Glossary of Mortgage Terms

Adjustable-Rate Mortgage (ARM) - A loan whose rate is fixed for an initial period and then changes at set intervals based on a market index, within limits called caps.

Amortization - Paying off a loan over time with regular payments that cover interest and principal.

Annual Percentage Rate (APR) - The yearly cost of a loan including the interest rate and certain fees, so you can compare offers.

Appraisal - An independent estimate of a property's market value, ordered by the lender.

Cash-Out Refinance - A refinance for more than you owe, with the difference paid to you in cash.

Closing - The final step, where you sign the loan documents and the home changes hands.

Closing Costs - Fees for services needed to close a loan, such as appraisal, title, recording and lender fees.

Closing Disclosure - A five-page form you receive at least three business days before closing that shows your final loan terms and costs.

Conforming Loan - A loan that meets Fannie Mae and Freddie Mac guidelines, including the annual loan limit.

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

Credit Score - A number based on your credit history that lenders use to judge risk.

Debt-to-Income Ratio (DTI) - Your monthly debt payments divided by your gross monthly income.

Discount Points - Upfront fees paid to lower the interest rate. One point equals 1% of the loan amount.

Down Payment - The part of the purchase price you pay up front and don't borrow.

DSCR - Debt Service Coverage Ratio: a property's rental income compared to its housing payment. Used to qualify investment loans.

Earnest Money - A deposit made with an offer to show the buyer is serious, usually credited at closing.

Equity - The difference between what your home is worth and what you owe on it.

Escrow Account - An account the lender uses to pay your property taxes and homeowners insurance from your monthly payment.

FHA Loan - A mortgage insured by the Federal Housing Administration.

Fixed-Rate Mortgage - A loan with an interest rate that stays the same for its entire term.

Gift Funds - Money from a family member or other allowed donor toward your down payment or closing costs, documented with a gift letter.

HELOC - Home Equity Line of Credit: a revolving credit line secured by your home.

Homeowners Insurance - Insurance that covers damage to your home and liability. Lenders require it.

Interest Rate - The cost of borrowing, shown as a yearly percentage of the loan balance.

Jumbo Loan - A loan larger than the conforming loan limit.

Loan Estimate - A three-page form you receive within three business days of applying that shows estimated terms and costs.

Loan-to-Value (LTV) - The loan amount divided by the property's value.

Lock (Rate Lock) - A lender's commitment to hold an interest rate for a set period while your loan is processed.

Mortgage Broker - A licensed company that compares and arranges loans from multiple lenders for a borrower.

Mortgage Insurance - Insurance that protects the lender if a borrower defaults. Often required when the down payment is small.

NMLS - Nationwide Multistate Licensing System & Registry. Every mortgage company and loan officer has an NMLS number you can look up.

Non-QM Loan - A loan outside the standard "qualified mortgage" rules, such as bank statement or DSCR loans.

PITI - Principal, interest, taxes and insurance: the parts of a typical monthly mortgage payment.

Pre-Approval - A lender's review of your income, assets and credit that shows how much you can borrow.

Pre-Qualification - A quick estimate of what you might borrow, based on information you provide.

Principal - The amount you borrowed, not including interest.

Private Mortgage Insurance (PMI) - Mortgage insurance on conventional loans with a smaller down payment. It can be removed once you have enough equity.

Refinance - Replacing your current mortgage with a new one.

Reverse Mortgage - A loan for homeowners 62 and older that turns home equity into cash with no monthly principal and interest payment; the borrower must still live in the home and pay property taxes, homeowners insurance and upkeep.

Title Insurance - Insurance that protects the lender (and optionally you) against problems with the property's ownership history.

Underwriting - The lender's review of your application, documents and property to approve the loan.

USDA Loan - A mortgage guaranteed by the U.S. Department of Agriculture for eligible buyers in qualifying areas.

VA Loan - A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, service members and surviving spouses.