Mortgage Terms

The mortgage industry uses specific terminology that can be confusing for first-time home buyers. Understanding these key terms helps you navigate the home buying process more confidently and ensures you understand the loans you're considering. This glossary covers the most important mortgage terms you need to know.

Loan Types and Structures

Amortization: The process of spreading loan payments over time. Early payments go mostly toward interest, while later payments pay down more principal.

Fixed-Rate Mortgage: A loan with an interest rate that remains constant throughout the entire loan term, providing predictable monthly payments.

Adjustable-Rate Mortgage (ARM): A loan with an interest rate that can change periodically based on market indices, causing payments to fluctuate.

Interest-Only Mortgage: A loan where you pay only interest for a set period, then begin paying principal and interest.

Balloon Mortgage: A loan with low payments for a set period, then requires a large lump-sum payment to pay off the balance.

Costs and Fees

APR (Annual Percentage Rate): The true cost of borrowing, including interest and fees, expressed as a yearly rate. Higher than the interest rate because it includes lender fees.

Points (Discount Points): Fees paid to the lender at closing to reduce the interest rate. Each point typically costs 1% of the loan amount.

Closing Costs: Fees associated with finalizing the loan, including appraisal, title insurance, attorney fees, and recording fees. Typically 2-5% of the loan amount.

Escrow: An account where money is held by a third party (usually the lender) to pay property taxes, insurance, and other costs.

Origination Fee: A fee charged by the lender for processing the loan application, typically 0.5-1% of the loan amount.

Insurance and Guarantees

PMI (Private Mortgage Insurance): Insurance required when down payment is less than 20%, protecting the lender if you default.

MIP (Mortgage Insurance Premium): Similar to PMI but required for FHA loans.

VA Funding Fee: A fee required for VA loans, which can be rolled into the loan or paid upfront.

USDA Guarantee Fee: Required for USDA loans, similar to VA funding fee.

Title Insurance: Insurance protecting against claims to property ownership, required by lenders.

Qualification Terms

DTI (Debt-to-Income Ratio): The percentage of gross income used for debt payments. Lenders typically want this below 43%.

LTV (Loan-to-Value Ratio): The loan amount divided by the property value. LTV above 80% typically requires PMI.

Pre-Approval: A lender's estimate of how much you can borrow, based on verified financial information.

Underwriting: The process of evaluating your loan application to determine if you qualify.

Debt Service Coverage Ratio: For investment properties, the ratio of income to debt payments.

Loan Documents and Process

Loan Estimate: A document provided by lenders showing estimated loan terms, monthly payments, and closing costs.

Closing Disclosure: The final document showing all loan terms, received three days before closing.

Note: The legal document promising to repay the loan, specifying terms and consequences of default.

Deed: The legal document that transfers ownership of the property to you.

Recording Fees: Fees paid to local government to record the deed and mortgage.

Additional Key Terms

Equity: The portion of your home you actually own, calculated as home value minus loan balance.

Appraisal: An assessment of the property's value by a licensed professional, required by lenders.

Home Inspection: An evaluation of the property's condition, recommended before closing.

ASSETs: Resources with economic value that you own, including cash, investments, and property.

Cash Reserves: Money saved that isn't needed for the down payment or closing costs, typically 2-3 months of mortgage payments.