Mortgage glossary: the terms you will actually encounter

Core loan terms

Amortization is the process of paying down a loan through scheduled payments over its term. Early payments on a standard mortgage go mostly toward interest; later payments shift toward principal as the balance decreases. An amortization schedule shows exactly how each payment is split across the life of the loan.

APR, or annual percentage rate, is the interest rate plus certain lender fees expressed as a yearly rate. It is a standardized measure that allows comparison of loans with different fee structures. Two loans with the same interest rate can have different APRs if one carries more upfront fees.

Principal is the loan balance you owe, excluding interest. Each payment reduces the principal; early in the loan the reduction is small because much of the payment covers interest. DTI, or debt-to-income ratio, is your total monthly debt payments divided by your gross monthly income. Lenders use DTI to assess how much additional debt service you can handle.

Property and transaction terms

LTV, or loan-to-value ratio, is the loan amount divided by the appraised value of the property, expressed as a percentage. A lower LTV means more equity relative to the loan; lenders use LTV to price risk. An appraisal is a licensed professional's estimate of a property's market value, required by the lender to confirm the home is worth at least the purchase price.

Escrow in the mortgage context refers to an account managed by the loan servicer that holds funds for property taxes and homeowners insurance. A portion of your monthly mortgage payment goes into escrow; the servicer pays the tax bills and insurance premiums when due. At closing, you typically prepay several months of taxes and insurance to fund the escrow account.

Title refers to legal ownership of a property. A title search confirms the seller has clear, marketable title to transfer; title insurance protects the lender (and optionally you) against claims that arise from title defects not discovered in the search. Title insurance is typically required by lenders and is paid at closing.

Loan cost terms

Points, also called discount points, are prepaid interest paid at closing in exchange for a lower interest rate. One point equals one percent of the loan amount. Paying points makes financial sense only if the monthly savings exceed the upfront cost within your planned holding period.

PMI, or private mortgage insurance, is required by most conventional lenders when the down payment is below twenty percent. It protects the lender, not the borrower, against default losses. PMI can be canceled once you reach a set equity threshold. MIP, or mortgage insurance premium, is the FHA equivalent of PMI; it has a different fee structure and in many cases persists longer than conventional PMI.

Origination fee is a lender charge for processing the loan, expressed as a flat fee or a percentage of the loan amount. The Loan Estimate breaks down origination fees and other closing costs so you can compare lenders on a consistent basis. A no-closing-cost loan shifts these fees into the interest rate or the loan balance rather than requiring payment at closing.

Rate and program terms

Fixed-rate means the interest rate stays the same for the entire loan term, so the principal and interest payment never changes. An adjustable-rate mortgage, or ARM, holds a fixed rate for an initial period and then adjusts periodically based on an index plus a margin. The index is a published market rate that moves over time; the margin is a fixed amount the lender adds to it. Rate caps limit how much an ARM's rate can rise at each adjustment and over the life of the loan.

Conforming describes a loan that falls within the limits set annually by the Federal Housing Finance Agency, which can be sold to Fannie Mae or Freddie Mac. A jumbo loan exceeds that limit and is held by the lender, usually carrying stricter requirements. Conventional means a loan not insured or guaranteed by a government agency, as distinct from government-backed FHA, VA, and USDA programs.

A rate lock is a lender's commitment to hold a quoted rate for a set period, commonly thirty to sixty days, while you close. APR, the annual percentage rate, expresses the interest rate plus certain fees as a single yearly figure so loans with different fee structures can be compared on a consistent basis.

People and roles in a mortgage

The lender is the company that funds the loan and sets the terms within program rules. A loan officer works for a lender and guides you through application and approval. A mortgage broker is an intermediary who shops your application across multiple lenders rather than lending directly, which can widen your options. The underwriter is the person who evaluates your complete file against the lender's and the program's standards and issues the approval or its conditions.

The servicer is the company you actually send payments to after closing, which is often not the original lender, since loans are frequently sold or their servicing transferred. The servicer manages your escrow account, applies your payments, and handles requests such as canceling mortgage insurance. An appraiser is the licensed professional who estimates the home's value for the lender, and a title or closing agent, sometimes an attorney depending on the state, manages the closing, the title work, and the recording of the deed.

Application and closing documents

The Loan Estimate is a standardized three-page form the lender must provide within three business days of your application, listing the rate, APR, projected payment, and estimated closing costs. The Closing Disclosure mirrors it with the final, actual figures and must reach you at least three business days before closing, so you can compare the two before signing.

The note is the document in which you legally promise to repay the loan on the stated terms. The mortgage, or in some states a deed of trust, is the document that secures that promise by pledging the property as collateral, giving the lender the right to foreclose if you default. The Uniform Residential Loan Application, often called Form 1003, is the standard application that collects your income, assets, debts, and the property details.

A contingency is a condition in a purchase contract that lets a buyer withdraw without losing the deposit if it is not met, such as a financing, appraisal, or inspection contingency. Earnest money is the deposit a buyer puts down to show good faith when making an offer, applied toward the purchase at closing.

Government program and qualifying terms

FHA refers to the Federal Housing Administration, which insures loans made by approved lenders, allowing lower down payments and more flexible credit standards. VA refers to the Department of Veterans Affairs, which guarantees loans for eligible service members, veterans, and surviving spouses, enabling zero-down financing with no ongoing mortgage insurance. USDA refers to the Department of Agriculture's Rural Development program, which backs zero-down loans for qualifying buyers in eligible areas within income limits.

Entitlement is the amount the VA will guarantee on a borrower's behalf, the mechanism that allows VA loans to require no down payment; it can often be restored and reused after a prior VA loan is paid off. A funding fee is the one-time charge on most VA loans in place of mortgage insurance, which some borrowers are exempt from. A guarantee fee is the USDA's equivalent upfront charge, paired with a smaller annual fee.

Debt-to-income ratio, or DTI, is the total of your monthly debt payments divided by your gross monthly income, a primary measure lenders use to judge how much you can afford. A credit score is a number summarizing your credit history that influences both whether you qualify and the rate you are offered. An overlay is an additional requirement a particular lender imposes on top of a program's minimum, which is why the same borrower can get different answers from different lenders.

Equity, ownership, and payment terms

Equity is the share of the home you actually own, calculated as the property's value minus the balance you still owe. It grows as you pay down principal and as the home appreciates, and it shrinks if values fall. Being underwater, or in negative equity, means you owe more than the home is currently worth, which limits your ability to sell or refinance without bringing cash to close the gap.

PITI is shorthand for the four common components of a monthly payment: principal, interest, taxes, and insurance. Principal and interest repay the loan, while taxes and homeowners insurance are typically collected into escrow and paid by the servicer on your behalf. Forbearance is a temporary pause or reduction of payments a servicer may grant during hardship; it is not forgiveness, since the paused amounts still come due later under agreed terms.

Prepayment means paying more than the scheduled amount, or paying the loan off entirely, ahead of schedule. A prepayment penalty is a fee some loans charge for doing so, though it is uncommon on modern mortgages; checking your documents confirms whether one applies before you plan extra payments.