Mortgage & Loan Glossary: 100+ Financial Terms Explained

A

Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes periodically based on market conditions. Typically has a fixed rate for an initial period (3, 5, 7, or 10 years) before adjusting.
Amortization: The process of paying off a debt over time through regular payments. Early payments are mostly interest; later payments are mostly principal.
Amortization Schedule: A table showing each payment over the life of a loan, breaking down principal, interest, and remaining balance.
Annual Percentage Rate (APR): The total cost of a loan expressed as a yearly rate, including interest and fees. APR is typically higher than the interest rate.
Appraisal: A professional assessment of a property's market value, required by lenders before approving a mortgage.
Appreciation: An increase in a property's value over time due to market conditions, improvements, or other factors.
Assumable Mortgage: A mortgage that can be transferred from the seller to the buyer, allowing the buyer to take over the existing loan terms.

B

Balloon Mortgage: A mortgage with low monthly payments that ends with a large "balloon" payment of the remaining balance.
Basis Point: One hundredth of a percentage point (0.01%). 100 basis points = 1%. Used to describe small rate changes.
Bridge Loan: A short-term loan used to "bridge" the gap between buying a new home and selling an existing one.
Buyer's Agent: A real estate agent who represents the buyer in a transaction. Their commission is typically paid by the seller.
Buydown: Paying extra upfront (discount points) to reduce the interest rate on a mortgage.

C

Cap: A limit on how much an ARM's interest rate can increase—per adjustment period and over the life of the loan.
Cash-Out Refinance: Refinancing for more than you owe and receiving the difference as cash. Uses home equity.
Certificate of Eligibility (COE): Document from the VA confirming a veteran's eligibility for a VA loan.
Clear Title: Property ownership without any liens, disputes, or legal questions.
Closing: The final step in a real estate transaction where documents are signed and ownership transfers.
Closing Costs: Fees and expenses paid at closing, typically 2-5% of the loan amount. Includes origination fees, appraisal, title insurance, etc.
Closing Disclosure: A five-page document detailing final loan terms and closing costs, provided at least 3 days before closing.
Collateral: An asset pledged as security for a loan. For mortgages, the home is the collateral.
Compound Interest: Interest calculated on both the principal and accumulated interest. "Interest on interest."
Conforming Loan: A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan limits ($766,550 in most areas for 2024).
Contingency: A condition in a purchase contract that must be met before the sale is finalized (e.g., inspection, financing, appraisal).
Conventional Loan: A mortgage not insured by a government agency (FHA, VA, USDA). May be conforming or non-conforming.
Cosigner: A person who signs a loan with the primary borrower, taking responsibility if the borrower defaults.
Credit Report: A detailed record of your credit history from the three major bureaus (Equifax, Experian, TransUnion).
Credit Score: A three-digit number (300-850) representing creditworthiness. Higher scores get better loan terms.

D

Debt-to-Income Ratio (DTI): Monthly debt payments divided by gross monthly income. Lenders typically want 43% or less.
Deed: A legal document that transfers property ownership from seller to buyer.
Deed of Trust: A document giving a trustee the right to sell the property if the borrower defaults. Used instead of a mortgage in some states.
Default: Failure to meet the terms of a loan agreement, typically by missing payments.
Depreciation: A decrease in property value over time due to wear, market conditions, or other factors.
Discount Points: Prepaid interest paid at closing to reduce the interest rate. One point = 1% of the loan amount.
Down Payment: The upfront cash payment made when purchasing a home. Expressed as a percentage of purchase price.

E

Earnest Money: A deposit made when submitting an offer, showing the buyer is serious. Typically 1-3% of purchase price.
Equity: The difference between your home's market value and what you owe on the mortgage. Your ownership stake.
Escrow: A neutral third party that holds funds/documents during a transaction. Also, an account where lenders hold money for taxes and insurance.
Escrow Account: An account managed by your lender to pay property taxes and homeowners insurance on your behalf.

F

Fannie Mae (FNMA): Federal National Mortgage Association. A government-sponsored enterprise that buys mortgages from lenders.
FHA Loan: A mortgage insured by the Federal Housing Administration. Lower down payment and credit requirements, but requires mortgage insurance.
FICO Score: The most commonly used credit score, named after Fair Isaac Corporation. Ranges from 300-850.
Fixed-Rate Mortgage: A mortgage with an interest rate that stays the same for the entire loan term.
Forbearance: A temporary reduction or suspension of mortgage payments during financial hardship.
Foreclosure: The legal process where a lender takes possession of a property after the borrower defaults.
Freddie Mac (FHLMC): Federal Home Loan Mortgage Corporation. Like Fannie Mae, buys mortgages from lenders to maintain market liquidity.
Front-End Ratio: Housing costs (PITI) divided by gross monthly income. Lenders typically want 28% or less.

G

Good Faith Estimate (GFE): Replaced by Loan Estimate in 2015. Was a document estimating closing costs.
Grace Period: The time after a payment due date during which you can pay without penalty. Also, the period after graduation before student loan payments begin.
Gross Income: Total income before taxes and deductions. Used to calculate DTI ratios.

H

HELOC (Home Equity Line of Credit): A revolving line of credit secured by your home. Borrow as needed during a draw period, then repay.
Home Equity Loan: A lump-sum loan secured by your home equity, with fixed payments. Often called a "second mortgage."
Homeowners Association (HOA): An organization in a planned community that enforces rules and collects fees for common area maintenance.
Homeowners Insurance: Insurance that covers damage to your home and possessions, plus liability. Required by lenders.
Housing Ratio: See Front-End Ratio.
HUD-1 Settlement Statement: Replaced by Closing Disclosure in 2015. Was a document itemizing all closing costs.

I

Index: A benchmark interest rate used to calculate ARM adjustments (e.g., SOFR, Prime Rate).
Interest: The cost of borrowing money, expressed as a percentage rate.
Interest-Only Mortgage: A loan where you pay only interest for a period (typically 5-10 years), then principal and interest.
Interest Rate: The percentage charged on a loan. Determines your monthly payment but doesn't include fees (see APR).

J

Jumbo Loan: A mortgage exceeding conforming loan limits ($766,550 in most areas for 2024). Typically requires higher credit and down payment.

L

Lien: A legal claim on a property as security for a debt. Must be paid off before selling.
Loan Estimate: A document provided within 3 business days of application, estimating loan terms and closing costs.
Loan-to-Value Ratio (LTV): Loan amount divided by property value. 80% LTV means 20% down payment. Higher LTV = more risk = PMI required.
Lock-In: A commitment from a lender to hold a specific interest rate for a period (typically 30-60 days).

M

Margin: The percentage added to the index to determine an ARM's interest rate. Index + Margin = Rate.
Market Value: The price a property would likely sell for in the current market.
Maturity Date: The date when a loan must be paid in full.
MIP (Mortgage Insurance Premium): Insurance required on FHA loans, paid both upfront (1.75%) and annually (0.45-1.05%).
Mortgage: A loan secured by real property. Also, the legal document giving the lender a claim on the property.
Mortgage Broker: A professional who shops multiple lenders on your behalf to find the best loan terms.
Mortgage Insurance: Insurance protecting the lender if you default. Required when down payment is less than 20%.

N

Negative Amortization: When payments don't cover interest, causing the loan balance to grow. Rare and risky.
Net Worth: Total assets minus total liabilities. Your overall financial position.
Non-Conforming Loan: A mortgage that doesn't meet Fannie Mae/Freddie Mac guidelines (e.g., jumbo loans).
Note: See Promissory Note.

O

Origination Fee: A fee charged by the lender for processing a new loan, typically 0.5-1% of the loan amount.
Owner-Occupied: A property where the owner lives, as opposed to an investment/rental property. Gets better loan terms.

P

PITI: Principal, Interest, Taxes, and Insurance—the four components of a typical monthly mortgage payment.
PMI (Private Mortgage Insurance): Insurance required on conventional loans when down payment is less than 20%. Protects lender, paid by borrower.
Points: See Discount Points.
Pre-Approval: A lender's conditional commitment after reviewing your finances. Stronger than pre-qualification.
Pre-Qualification: A rough estimate of how much you can borrow based on self-reported information. Less reliable than pre-approval.
Prepayment Penalty: A fee charged for paying off a loan early. Rare on modern mortgages.
Prime Rate: The interest rate banks charge their best customers. Used as a base for many adjustable rates.
Principal: The amount borrowed, excluding interest. Also, each payment amount that reduces the loan balance.
Promissory Note: A legal document in which the borrower promises to repay the loan under specified terms.
Property Tax: Tax levied by local governments based on property value. Typically 0.5-2.5% of value annually.

Q

Qualified Mortgage (QM): A loan meeting specific Consumer Financial Protection Bureau standards, offering some legal protection to lenders.
Qualifying Ratios: The DTI ratios (front-end and back-end) used to determine if a borrower can afford a mortgage.

R

Rate Lock: See Lock-In.
Real Estate Agent: A licensed professional who helps buyers and sellers with real estate transactions.
Recording Fees: Fees charged by the county to record the deed and mortgage in public records.
Refinance: Replacing an existing mortgage with a new one, typically to get better terms or access equity.
Right of Rescission: The right to cancel certain loans within 3 business days of closing (applies to refinances of primary residence).

S

Second Mortgage: A mortgage taken out on a property that already has a mortgage. Subordinate to the first mortgage.
Seller Concession: The seller agreeing to pay some of the buyer's closing costs.
Short Sale: Selling a home for less than the mortgage balance, with lender approval.
SOFR (Secured Overnight Financing Rate): A benchmark interest rate that replaced LIBOR. Used as an index for many ARMs.
Subordination: The process of establishing priority among liens. First mortgage is paid before second mortgage.
Survey: A professional measurement of property boundaries and structures.

T

Title: Legal ownership of a property.
Title Insurance: Insurance protecting against title defects, liens, or other ownership issues.
Title Search: An examination of public records to verify clear ownership and identify any liens.
Transfer Tax: A tax charged when property ownership changes hands. Varies by state/locality.
Truth in Lending Act (TILA): Federal law requiring clear disclosure of loan terms and costs to borrowers.

U

Underwriting: The process of evaluating a loan application to determine risk and approval.
Underwater: Owing more on a mortgage than the home is worth. Also called "negative equity."
USDA Loan: A zero-down-payment loan for rural properties, backed by the U.S. Department of Agriculture.

V

VA Loan: A mortgage guaranteed by the Department of Veterans Affairs. Zero down payment, no PMI.
VA Funding Fee: A one-time fee on VA loans (0.5-3.3% of loan), which may be waived for disabled veterans.
Variable Rate: An interest rate that can change over time based on market conditions.
Verification of Employment (VOE): Confirmation from your employer of your job status and income.

W

Walk-Through: A final inspection of the property before closing to verify condition and repairs.
Warranty Deed: A deed guaranteeing that the seller has clear title and the right to sell the property.

Mortgage & Loan Glossary

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