Mortgage Glossary

Acceleration Clause

A clause in your loan documents that lets the lender demand the full remaining balance if you seriously default, such as by missing payments.

Adjustable-Rate Mortgage (ARM)

A mortgage with a fixed rate for an initial period, such as 5, 7 or 10 years, after which the rate adjusts periodically based on a market index plus a margin, within set caps.

Amortization

The schedule for paying off a loan over time through regular payments of principal and interest. Early payments go mostly toward interest; later payments go mostly toward principal.

Annual Percentage Rate (APR)

The yearly cost of a loan, including the interest rate plus certain fees such as points, origination charges and mortgage insurance. It is useful for comparing loan offers.

Appraisal

An independent estimate of a property's market value by a licensed or certified appraiser. Lenders use it to confirm the home is worth at least the loan amount.

Appraisal Contingency

A clause in a purchase contract that lets the buyer renegotiate or cancel if the appraisal comes in below the purchase price.

Assessed Value

The value a local government assigns to a property to calculate property taxes. It can differ from the market value and the appraised value.

Assumable Loan

A mortgage that a buyer can take over from the seller, keeping the existing rate and terms, with lender approval. FHA, VA and USDA loans are generally assumable.

Basis Point

One hundredth of a percentage point (0.01%). A rate change of 25 basis points equals 0.25%.

Break-Even Point

The point at which the monthly savings from a refinance or from paying discount points equal the upfront costs.

Bridge Loan

A short-term loan that uses the equity in your current home to help you buy a new home before your current home sells.

Buydown

Money paid at closing, by the buyer, seller or builder, to lower the interest rate. A temporary buydown lowers the rate for the first year or two, while a permanent buydown uses discount points to lower it for the life of the loan.

Cash Reserves

Savings or liquid assets left over after closing, often measured in months of mortgage payments. Some loans require reserves to qualify.

Cash to Close

The total amount you need to bring to closing, including your down payment and closing costs, minus any credits or deposits already paid.

Cash-Out Refinance

A refinance for more than you currently owe, with the difference paid to you in cash.

Closing

The final step of a home purchase or refinance, when loan documents are signed, funds are disbursed and ownership transfers. Also called settlement.

Closing Disclosure

A five-page form showing the final terms and costs of your loan. You must receive it at least three business days before closing.

Co-Borrower

An additional borrower on a mortgage who shares responsibility for repayment and whose income and credit are used to qualify.

Co-Signer

A person who agrees to be responsible for the loan if the borrower does not pay, helping the borrower qualify.

Combined Loan-to-Value Ratio (CLTV)

The total of all loans secured by a property, such as a first mortgage and a HELOC, as a percentage of the property's value.

Conforming Loan

A conventional loan that meets Fannie Mae and Freddie Mac guidelines, including the conforming loan limit.

Conforming Loan Limit

The maximum loan amount Fannie Mae and Freddie Mac will purchase, set each year by the Federal Housing Finance Agency (FHFA). Limits are higher in designated high-cost areas.

Construction Loan

A short-term loan that funds building a home, with money released in stages, called draws, as work is completed. Some construction loans convert into a permanent mortgage once the home is finished.

Contingency

A condition in a purchase contract that must be met for the sale to go through, such as financing, appraisal or home inspection.

Conventional Loan

A mortgage that is not insured or guaranteed by a government agency such as the FHA, VA or USDA.

Credit Report

A detailed record of your borrowing and repayment history, compiled by the credit bureaus Equifax, Experian and TransUnion. You can check your reports for free at AnnualCreditReport.com.

Credit Score

A number that summarizes your credit risk based on your credit report. Mortgage lenders use it to help determine eligibility, rates and mortgage insurance costs.

Debt-to-Income Ratio (DTI)

Your total monthly debt payments, including your new housing payment, divided by your gross monthly income. Lenders use it to measure your ability to manage payments.

Default

Failing to meet the terms of your loan, most commonly by missing payments.

Discount Points

Optional fees paid at closing to lower your interest rate. One point equals 1% of the loan amount.

Down Payment

The portion of the purchase price you pay upfront rather than borrow. Minimums range from 0% for eligible VA and USDA borrowers to 3% to 3.5% for many conventional and FHA loans.

Down Payment Assistance (DPA)

Grants, forgivable loans or low-interest loans that help buyers cover their down payment or closing costs. Programs are offered by state and local housing agencies, nonprofits and some lenders.

DSCR Loan

A debt service coverage ratio loan for investment properties that qualifies the borrower based on the property's rental income compared with its expenses, rather than personal income.

Due-on-Sale Clause

A clause that requires the loan to be paid in full if the property is sold or transferred, unless the loan is assumable.

Earnest Money

A good-faith deposit a buyer makes when an offer is accepted. It is typically applied toward the down payment or closing costs at closing.

Equity

The difference between your home's market value and the amount you owe on it.

Escrow Account

An account managed by your loan servicer that collects part of your property taxes and homeowners insurance with each monthly payment and pays those bills when due. Also called an impound account.

Fannie Mae

The Federal National Mortgage Association, a government-sponsored enterprise that buys conventional mortgages from lenders, helping keep money available for new home loans.

FHA Loan

A mortgage insured by the Federal Housing Administration, with a minimum down payment of 3.5% and flexible credit guidelines. It requires upfront and annual mortgage insurance premiums.

Fixed-Rate Mortgage

A mortgage with an interest rate that stays the same for the life of the loan, so your principal and interest payment never changes.

Flood Insurance

Insurance that covers flood damage, which standard homeowners policies do not. Lenders require it for homes in high-risk flood zones identified by FEMA.

Forbearance

A temporary pause or reduction in mortgage payments granted by your servicer during a financial hardship. The paused amount still needs to be repaid later.

Foreclosure

The legal process a lender uses to take ownership of a property and sell it when the borrower defaults on the loan.

Freddie Mac

The Federal Home Loan Mortgage Corporation, a government-sponsored enterprise that buys conventional mortgages from lenders, similar to Fannie Mae.

Gift Letter

A signed letter from a donor confirming that money given for a down payment or closing costs is a gift that does not need to be repaid.

Ginnie Mae

The Government National Mortgage Association, a government agency that guarantees securities backed by FHA, VA and USDA loans.

Home Equity Line of Credit (HELOC)

A revolving line of credit secured by your home's equity. You draw funds as needed during a draw period, usually at a variable rate, then repay over a set repayment period.

Home Equity Loan

A lump-sum loan secured by your home's equity, usually with a fixed rate and fixed monthly payments, taken out in addition to your first mortgage.

Homeowners Association (HOA) Dues

Regular fees paid to a homeowners or condominium association for shared maintenance and amenities. Lenders include them when calculating your debt-to-income ratio.

Homeowners Insurance

Insurance that protects your home and belongings against covered losses such as fire or storm damage, and provides liability coverage. Lenders require it on financed homes.

Index

The market benchmark an adjustable-rate mortgage is tied to, such as the Secured Overnight Financing Rate (SOFR). After the fixed period, your rate equals the index plus the margin.

Interest Rate

The percentage a lender charges for borrowing money, which determines your monthly principal and interest payment.

Jumbo Loan

A mortgage larger than the conforming loan limit. Jumbo loans usually require higher credit scores, larger down payments and more cash reserves.

Lien

A legal claim against a property as security for a debt. A mortgage creates a lien that is released once the loan is paid off.

Loan Estimate

A standardized three-page form lenders must provide within three business days of your application, showing the estimated rate, payment and closing costs.

Loan Modification

A permanent change to your loan's terms, such as the interest rate, term or balance, agreed to by your servicer to make payments more affordable during a hardship.

Loan Officer

A licensed or registered professional who helps borrowers choose a loan program, complete the application and move through the approval process.

Loan-to-Value Ratio (LTV)

Your loan amount as a percentage of the home's value or purchase price, whichever is lower. For example, a $360,000 loan on a $400,000 home is a 90% LTV.

Margin

A fixed percentage added to the index to set an adjustable-rate mortgage's interest rate after the initial fixed period. The margin stays the same for the life of the loan.

Mortgage Broker

A licensed professional who works with multiple wholesale lenders to compare loan options and arrange financing on the borrower's behalf.

Mortgage Insurance Premium (MIP)

Mortgage insurance on FHA loans, made up of an upfront premium that can be financed and an annual premium paid monthly.

Mortgage Servicer

The company that collects your monthly payments, manages your escrow account and handles questions about your loan after closing. It may be different from the company that originated your loan.

NMLS

The Nationwide Multistate Licensing System, the national registry for mortgage companies and loan originators. You can verify any NMLS number at nmlsconsumeraccess.org.

Non-QM Loan

A non-qualified mortgage that uses alternative ways to verify ability to repay, such as bank statements or rental income. It is often used by self-employed borrowers and investors.

Origination Fee

A fee charged by the lender for processing and underwriting a loan, often shown as a percentage of the loan amount.

Piggyback Loan

A second mortgage taken out at the same time as the first, often to avoid PMI or a jumbo loan. A common structure is 80-10-10: an 80% first mortgage, a 10% second mortgage and 10% down.

PITI

Principal, interest, taxes and insurance: the four main parts of a monthly mortgage payment.

Pre-Approval

A lender's conditional commitment to lend up to a certain amount after reviewing your credit, income, assets and documents.

Pre-Qualification

An early estimate of how much you may be able to borrow, based on information you provide, without full verification.

Prepayment Penalty

A fee for paying off a loan early. Federal rules restrict prepayment penalties, and most residential mortgages today do not have one.

Principal

The amount borrowed, or the remaining loan balance, not including interest.

Private Mortgage Insurance (PMI)

Insurance usually required on conventional loans with less than 20% down. It can be canceled at 80% of the home's original value and ends automatically at 78%.

Promissory Note

The legal document in which you promise to repay the loan, stating the amount, interest rate and repayment terms.

Property Taxes

Taxes charged by local governments based on a property's assessed value. They are often paid through your escrow account.

Rate Caps

Limits on how much an adjustable-rate mortgage's interest rate can change, including caps on the first adjustment, each later adjustment and the total over the life of the loan.

Rate Lock

A lender's guarantee of a specific interest rate and terms for a set period, commonly 30 to 60 days, while your loan is processed.

Recast

Making a large lump-sum payment toward principal and having your servicer recalculate your monthly payment based on the lower balance, while keeping the same rate and term. Not all loans allow recasting.

Refinance

Replacing your current mortgage with a new loan, often to lower your rate or payment, change your term or access equity.

Reverse Mortgage (HECM)

A loan for homeowners aged 62 and older that converts home equity into cash without monthly mortgage payments. The most common type, the Home Equity Conversion Mortgage (HECM), is insured by the FHA. The loan is repaid when the borrower sells, moves out permanently or passes away, and borrowers must keep paying property taxes, insurance and upkeep.

Second Mortgage

A loan secured by your home that ranks behind your first mortgage, such as a home equity loan or HELOC.

Seller Concessions

Money the seller agrees to put toward the buyer's closing costs, within limits set by the loan program.

Short Sale

A sale in which the lender agrees to accept less than the amount owed on the mortgage, usually to avoid foreclosure.

Subordination

An agreement that sets the order of liens on a property, such as when a HELOC lender agrees to stay in second position so you can refinance your first mortgage.

Title

The legal right to own a property. A title search confirms the seller has the right to sell and identifies any liens or claims.

Title Insurance

Insurance that protects the lender, and the owner if an owner's policy is purchased, against losses from title problems such as errors in public records, undisclosed liens or fraud.

Underwriting

The lender's review of your credit, income, assets and the property to decide whether to approve your loan.

USDA Loan

A mortgage backed by the U.S. Department of Agriculture for homes in eligible rural and suburban areas, offering no-down-payment financing for borrowers within income limits.

VA Funding Fee

A one-time fee on most VA loans that helps fund the program. It can be financed into the loan, and some veterans are exempt.

VA Loan

A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, service members and some surviving spouses, often with no down payment and no monthly mortgage insurance.