Mortgage Glossary

A mortgage with an interest rate that changes periodically based on market conditions. Typically starts with a lower rate than fixed mortgages for an initial period (e.g., 5, 7, or 10 years), then adjusts annually. Includes rate caps to limit increases.

The process of paying off a loan through regular monthly payments over time. Each payment includes both principal (loan amount) and interest. Early payments are mostly interest, while later payments are mostly principal.

An independent professional assessment of a property's market value, required by lenders to ensure the home is worth the loan amount. Costs $400-$600. Appraiser considers comparable sales, condition, location, and improvements.

The total cost of borrowing expressed as a yearly rate, including interest and fees. APR is typically higher than the interest rate because it includes costs like origination fees, discount points, and mortgage insurance.

Fees and expenses paid at closing, typically 2-5% of the loan amount. Includes appraisal fees, title insurance, origination fees, attorney fees, and prepaid items like property taxes and homeowners insurance.

A condition in a purchase contract that must be met for the sale to proceed. Common contingencies include financing (loan approval), appraisal (home value), and inspection (property condition). Protects buyers from losing earnest money if conditions aren't met.

A mortgage not insured or guaranteed by the federal government. Typically requires higher credit scores (620+) and larger down payments than government-backed loans. Offers more flexibility and no upfront mortgage insurance if you put down 20%.

The upfront cash payment you make toward the purchase price of a home. Expressed as a percentage of the purchase price. Larger down payments result in lower monthly payments and better interest rates.

Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders use DTI to determine how much house you can afford. Most lenders prefer DTI below 43%, though some programs allow up to 50%.

A deposit made to demonstrate serious intent to purchase a home, typically 1-3% of purchase price. Held in escrow and applied to down payment and closing costs at closing. Refunded if contingencies aren't met; forfeited if buyer backs out without valid reason.

The difference between your home's current market value and the amount you owe on your mortgage. Equity builds as you pay down your loan and as your home appreciates in value. Can be accessed through home equity loans or cash-out refinancing.

An account held by your lender to pay property taxes and homeowners insurance on your behalf. Part of your monthly mortgage payment goes into escrow, and the lender pays these bills when due. Ensures these critical expenses are always paid.

A mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores or smaller down payments. Requires as little as 3.5% down with a 580 credit score. Includes both upfront and monthly mortgage insurance premiums.

A mortgage with an interest rate that remains constant for the entire loan term, typically 15 or 30 years. Monthly principal and interest payments never change, making budgeting predictable. Most popular mortgage type in the U.S.

A professional examination of a property's condition, typically conducted after an offer is accepted but before closing. Identifies potential issues with structure, systems, and components. Costs $300-$500. Not required by lenders but highly recommended.

A mortgage that exceeds conforming loan limits set by Fannie Mae and Freddie Mac ($766,550 in most areas for 2024). Requires excellent credit (700+), larger down payments (10-20%), and more cash reserves. Rates are often competitive with conventional loans.

The loan amount divided by the home's appraised value or purchase price (whichever is lower), expressed as a percentage. A $200,000 loan on a $250,000 home is 80% LTV. Lower LTV ratios qualify for better rates and terms.

A fee charged by the lender for processing your loan application, typically 0.5-1% of the loan amount. Covers administrative costs like underwriting, document preparation, and loan setup. Sometimes negotiable.

Insurance required on conventional loans when down payment is less than 20%. Protects the lender if you default. Typically costs 0.5-1% of loan amount annually. Can be removed once you reach 20% equity through payments or appreciation.

Upfront fees paid to lower your interest rate. One point equals 1% of the loan amount. Buying points makes sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments.

A lender's conditional commitment to lend you a specific amount based on verified income, assets, and credit. Stronger than pre-qualification because it involves documentation review. Shows sellers you're a serious buyer.

An estimate of how much you might be able to borrow based on self-reported financial information. No documentation required. Less reliable than pre-approval. Good starting point but won't impress sellers.

The original amount borrowed, excluding interest. Also refers to the portion of your monthly payment that reduces the loan balance. As you pay down principal, you build equity and pay less interest over time.

An agreement that guarantees a specific interest rate for a set period (typically 30-60 days) while your loan is processed. Protects you from rate increases but prevents you from benefiting if rates drop. Some lenders offer float-down options.

Replacing your current mortgage with a new one, typically to get a lower interest rate, change loan terms, or access home equity through cash-out refinancing. Involves new closing costs and underwriting.

Insurance that protects against financial loss from defects in title to real property. Covers issues like liens, encumbrances, or ownership disputes. One-time premium paid at closing. Lender's policy (required) protects the lender; owner's policy (optional) protects you.

The process where a lender evaluates your financial information to determine loan approval and terms. Underwriters verify income, assets, employment, credit, and property value. Can take 1-2 weeks. May request additional documentation.

A mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. Offers 100% financing (no down payment), no mortgage insurance, competitive rates, and limited closing costs.