Key Mortgage Terminology To Know

Applying for a mortgage can feel like a daunting process, one that comes with lots of paperwork and a long list of mortgage terminology that you’ll need to understand. This guide covering the most common mortgage terms can help you sort through it all and navigate the process with confidence. 

Key mortgage terms

Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage is one that often features a lower initial interest rate than a fixed-rate mortgage for a set period, after which the rate resets at regular intervals for the remainder of the loan term. Because the rate fluctuates regularly once the introductory period ends, your mortgage payments may increase or decrease depending on market conditions. An example is a 5/1 ARM, where the initial fixed rate lasts for five years and then adjusts every year for the remaining 25 years. 

Amortization

The process of making installment payments on your mortgage debt over a set period, such as 15 or 30 years, is known as amortization. Each installment payment over the life of the loan is divided between repaying the loan principal, which is the amount of money you borrowed to purchase the home, and paying the interest on the loan. When a loan is fully amortized, or mature, that means it’s been paid off entirely by the end of its amortization schedule.

“Amortization is essentially the systematic repayment of a loan via scheduled payments that cover both principal and interest over the term of the loan,” says Shaun Michael Lewis, CEO of the real estate brokerage Clearwater Properties. “This is a vital concept because it can show buyers how much of their monthly payment actually reduces their debt versus how much is going toward interest.”

APR

APR, or annual percentage rate, reflects the cost of borrowing a mortgage. A broader measure than the interest rate alone, the APR includes the interest rate, discount points and other fees associated with the loan. The APR is higher than the interest rate and a better gauge of the true cost of the loan.

Balloon mortgage

Balloon mortgages are short-term home loans, often spanning five to seven years. With these non-qualified loans (see Non-QM loan below), borrowers make relatively small monthly payments for a set time. Then, at the end of the loan term, they settle the remaining balance in a single lump sum: Their payment suddenly balloons (hence the name). This payment could amount to a large sum, making balloon mortgages quite risky.

Biweekly payment

Making biweekly mortgage payments is a strategy to pay off your mortgage faster that involves making half of your monthly loan payment every two weeks instead of paying the full amount once per month. With this approach, you effectively make 26 biweekly payments — which is equal to 13 full monthly payments — per year, allowing you to make an extra mortgage payment each year.

Cash-out refinance

A cash-out refinance gives you access to a chunk of your home equity by paying off and replacing your existing mortgage with a new, larger mortgage. The difference between your existing mortgage balance and the new, bigger mortgage is provided to you in the form of a lump sum payment. 

“Instead of just lowering the rate or changing the term, you take out a new, larger loan, pay off the old one, and pocket the difference,” says Casey Gaddy, a Realtor with The Gaddy Group.

Closing costs

Closing costs are fees associated with getting a mortgage. They include several expenses paid at the time of the loan signing, or closing, such as an origination fee, appraisal fee, credit report fee and title search fee. Both homebuyers and sellers incur closing costs; more of them often fall to the buyer, but sometimes sellers cover some of those costs.

Conforming loan

A conforming loan is a mortgage that meets the guidelines and loan limits set by the Federal Housing Finance Agency (FHFA). The guidelines include criteria for the borrower’s creditworthiness, debt-to-income ratio and down payment. The loan limits, which change annually and vary by county, dictate the maximum loan that government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are willing to purchase or to back. By conforming to these guidelines, lenders can sell these loans to Fannie Mae and Freddie Mac, reducing their risk and enabling them to offer better terms to borrowers.

Construction loan

Construction loans are designed to provide short-term financing that’s specifically meant for building a residential home. This loan type can be used to cover expenses such as contractor labor, building materials and permit costs. Two primary examples of construction loans are a construction-only loan and a construction-to-permanent loan. The former must be fully repaid when the home construction is complete or rolled into a traditional mortgage. The latter ter transitions to a permanent gmortage othe nce home construction is complete.

Conventional loan

A conventional loan is any mortgage not backed by the government; it is financed entirely by the private sector. Unlike FHA, VA and USDA loans, which are insured or guaranteed by federal agencies, a conventional loan is backed by the lender issuing it. Conventional loans traditionally required a 20 percent down payment; some now take less but often charge private mortgage insurance (PMI).

Co-signer

A co-signer is an individual who agrees to serve as guarantor for the primary borrower on a mortgage loan. The co-signer becomes responsible for repaying the loan in the event that the primary borrower defaults (or fails to repay the loan). Despite taking on this responsibility, the co-signer has no legal claim on the loan funds. This differs from a co-borrower, who can access the loan funds and is also responsible for repaying the loan from the start.  

Debt-to-income (DTI) ratio

Your debt-to-income ratio (DTI) is a measurement that compares all your monthly debt responsibilities to your income, and it helps a lender determine your borrowing capacity. Your DTI is calculated by dividing your total monthly debt payments by your gross monthly income. For example, if a borrower’s debt payments total $4,000 a month and their gross monthly income is $10,000, their DTI ratio would be 40 percent.

Down payment

A down payment is the amount of a home’s purchase price that a borrower plans to pay upfront in cash. A larger down payment can help improve a borrower’s chances of getting a lower interest rate. Different kinds of mortgages have varying minimum down payments.

Earnest money

Earnest money is a deposit a homebuyer makes when entering into a purchase and sale agreement (PSA) for a home, generally as a sign of good-faith intent. The deposit is typically held by a title company in an escrow account. When the home sale closes, the earnest money goes toward the down payment or closing costs. If the sale falls through, the deposit either goes back to the buyer or the seller, depending on whether the reason for termination was permitted in the PSA.

Equity

The difference between the balance owed on your mortgage and your home’s value is known as equity. In other words, this is the amount of your home that you own outright. For example, if a home is valued at $300,000 and your mortgage balance is $100,000, your equity is $200,000. Equity can be a valuable source of money that you can tap to help reach other financial goals.

Escrow

An escrow account — also called an impound account — holds the portion of a borrower’s monthly mortgage payment slated for homeowners’ insurance premiums and property taxes. Escrow accounts also hold any earnest money the buyer deposits between the time their offer has been accepted and the closing. An escrow account for insurance and taxes is usually set up by the mortgage lender or servicer, which makes the insurance and tax payments on the borrower’s behalf. This system assures the lender that those bills get paid.

FHA loan

FHA loans are mortgages insured by the Federal Housing Administration (FHA). That means the FHA is backing them; should you default, it’ll repay the lender — thereby reducing the lender’s risk. As a result, FHA loans often have more lenient credit requirements and lower down payments than conventional loans; they’re especially popular with first-time homebuyers.

Fixed-rate mortgage

A fixed-rate mortgage is a loan that carries the same interest rate for the entire repayment term (life of the loan) — in contrast to an adjustable-rate mortgage, which has an interest rate that fluctuates based on market conditions. Borrowers can only change the interest rate on a fixed-rate mortgage by refinancing it.

Forbearance

Forbearance refers to a short pause on mortgage payments, typically because of financial hardship. Once the forbearance period is over, homeowners can either repay the missed payments in a lump sum, enter a repayment plan or request a loan modification.

Foreclosure

If a homeowner fails to make payments on the mortgage as required, the process that typically follows is known as foreclosure. This is a legal process through which the lender takes possession of the home in order to sell it and recover some of the unpaid debt.

Homeowners insurance

Homeowners insurance is coverage that protects a policyholder’s home and personal belongings in the event of an unforeseen damaging or destructive event (fire, hurricane, etc.) or theft. Besides restoring the residential property — which can also include detached structures like garages, sheds or pool houses — homeowners insurance also covers liability for injuries to individuals or their belongings when they’re on the property. While homeowners insurance is not required by law, lenders typically demand borrowers obtain it as a condition of a mortgage.

Interest rate

The interest rate on a mortgage is what a lender charges you for borrowing money to purchase a home.  Factors that impact your interest rate include lender variation, general market movements and your risk level as a borrower. Short-term loans often carry lower interest rates than long-term ones (since the lender is getting its money back sooner) and people with better credit scores are typically eligible for lower interest rates than applicants with a challenged credit history.

Jumbo loan

A jumbo loan is a mortgage geared toward larger and/or more expensive properties. Jumbo loan amounts are higher than the general federally set standards for mortgages, known as the “conforming loan limits.” Most mortgages fall within these annually adjusted conforming limits, meaning banks are only allowed to lend a certain amount based on the geographic region where the home is located. For most of the U.S., $806,500 is the limit; in the most expensive areas, the limit for a conforming loan is $1,209,750 (in 2025). If you need more money than that, you must get a jumbo loan.

Loan estimate

A loan estimate is a three-page document containing details about a mortgage. Given to a potential borrower within days of their application, it includes estimates of the loan’s interest rate, monthly payment and the total closing costs, and also escrow charges, prepayment penalties and other pertinent expenses. The loan estimate is designed to make it easier for borrowers to compare terms when shopping for a mortgage, as all lenders use the same standardized form. Receiving one does not mean they’ve been approved or denied for the loan.

Loan-to-value (LTV) ratio

The loan-to-value ratio, or LTV ratio, compares the mortgage amount against the property’s value. An LTV ratio of 80 percent or less — which corresponds to a 20 percent down payment — has been the traditional benchmark for conventional loans; an LTV ratio above 80 percent means you’ll need to purchase mortgage insurance, an extra expense. Some government mortgages, such as FHA or VA loans, permit higher LTV ratios, and may or may not come with the mortgage insurance requirement.

Mortgage broker

A mortgage broker is an intermediary who matches prospective buyers with mortgage lenders, including banks, credit unions and other financial institutions. Buyers often seek the assistance of mortgage brokers to find the best loan for their situation and lowest rates available. Working with a mortgage broker can simplify the process of shopping for and comparing loan offers. Besides helping homebuyers find mortgages, brokers often interact with all parties involved in the lending process to ensure that the application is filled and filed correctly, and that loans close on time.

Mortgage insurance

Mortgage insurance is typically required on home loans where the buyer makes a less-than-20 percent down payment. The premiums are paid by the borrower, usually as part of their monthly mortgage repayment. This extra charge acts as protection for the lender in the event that you default on your loan, helping it recoup its funds. There are two basic types: private mortgage insurance (PMI), imposed on conventional loans, and mortgage insurance premiums (MIP) on FHA loans.

Non-QM loan

A non-QM loan (short for non-qualifying or non-qualified mortgage) is a type of mortgage that doesn’t meet standards established by the Consumer Financial Protection Bureau (CFPB). These loans are designed to provide financing options for borrowers who may not meet the traditional income, financial or creditworthiness criteria, but can still demonstrate the ability to repay a mortgage through alternative means. Since non-QM loans present a higher risk level for lenders, they often come with different terms and conditions and higher interest rates than standard mortgages.

Notice of default

A notice of default is a formal document that a lender files with the courts when a borrower is behind on their monthly mortgage payments. This document typically includes the borrower’s name and address, the lender’s name and information about the mortgage loan.

“This document marks the beginning of the foreclosure process, but because it is an early step, it is often still possible at this stage for homebuyers to halt the process via repayment or discussions or negotiations with the lender,” says Lewis.

Origination fee

An origination fee is charged by a lender for initiating, processing and/or underwriting your loan. In most cases, the origination fee on a mortgage is between 0.5 and 1 percent of the total loan amount and must be paid at closing.

PITI

PITI is an acronym for the four major parts of a mortgage payment: principal, interest, taxes and insurance. The first two are the portion of your payment that covers principal, or the amount borrowed, and interest, both of which go to the lender as repayment for the loan. Another portion covers property taxes and homeowners insurance premiums, and typically goes into an escrow account.

Points

Borrowers can purchase discount points, aka mortgage points, to lower the interest rate on their loan. Typically, one point costs 1 percent of the loan amount and lowers the rate by 0.25 percent (though it can vary by lender). The cost of points is included in the loan estimate, and the borrower pays for them at closing. In general, borrowers buy points to cut interest over the life of the loan, so buying them might only be worthwhile if the borrower stays in the home long enough to offset the upfront cost.

Preapproval

Preapproval is a step in the mortgage qualification process that requires submitting extensive financial documentation to a lender and completing a hard credit check to get an estimate of how much you could qualify to borrow. Note: It is not a firm promise that the lender will loan you the funds. However, after completing the preapproval process, the lender gives you a mortgage commitment letter, which you can show sellers to prove you’re in a strong position to buy a home. 

Prequalification

Prequalifying for a mortgage involves sharing some basic personal information with a lender; in exchange, the lender gives the prospective borrower an estimated loan amount and rate. The prequalification process is less involved than the preapproval process, and getting prequalified does not guarantee a borrower will be approved for a certain loan amount or rate. In short, there’s no commitment on the lender’s side. Prequalifying typically involves a soft credit check and requires no formal application.

Principal

Mortgage principal is the amount you originally borrowed from the bank or lender — your loan amount. Interest, by comparison, is what the lender is charging you to borrow the money. A monthly mortgage payment consists of both principal and interest payments.

Private mortgage insurance (PMI)

Private mortgage insurance (PMI), is a type of coverage a borrower is required to purchase if their down payment is less than 20 percent for a conventional loan. PMI protects the lender — not the borrower — from loss if the borrower stops making payments on the loan. When refinancing, PMI is required if the borrower’s home equity is less than 20 percent of the property’s value.

Rate lock

Interest rates change rapidly, and a rate lock helps ensure a borrower’s mortgage rate doesn’t change from initial application to closing. This lock helps protect borrowers if interest rates increase. Lenders lock rates on mortgages for a set period, often 30 to 120 days. The time frame varies by lender.

Refinance

Borrowers who already have a mortgage can refinance to a new loan with a different rate, term or both, using the new one to pay off the existing one. Borrowers don’t have to refinance with the same lender that holds their current mortgage.

One common reason for refinancing is to obtain a lower interest rate, usually because economic factors have driven rates lower or the borrower’s credit has improved. Borrowers may also refinance to shorten their loan term, pay off the mortgage faster and lower the total interest paid overall.

Reverse mortgage

Reverse mortgages are available to homeowners of a certain age (generally, at least 62 years old, though as young as 55 years with some loans) who’ve paid off all or most of their mortgages. Under this arrangement, a lender pays the homeowner each month. The homeowner is borrowing against their equity, in cash; the payments are tax-free and can be interest-free as well (that is, the borrower doesn’t have to make any payments towards it during their lifetime). When the borrower dies, sells or permanently leaves the home, the lender is repaid or takes possession of the property.

Right of rescission

Established as part of the Truth in Lending Act (TILA), the right of rescission allows borrowers to cancel certain home lending agreements within a specific period without incurring any financial penalties. Consumers typically have three business days after signing a contract to exercise their right of rescission. However, this right only applies to refinances, home equity loans and HELOCs — not purchase mortgages.

Short sale

With a short sale, a lender permits a borrower to sell their property for less than their outstanding mortgage balance. The lender then forgives the difference between the original loan and the home’s sale price. Borrowers who are significantly underwater on their homes (that is, owe more on them than they’re worth) might opt for a short sale to avoid foreclosure. However, this action can adversely affect a borrower’s credit for several years.

“Unlike the name, a short sale is anything but quick. It can take several months, up to a year or more, to get to closing,” says Gaddy.

Title insurance

Title insurance protects both homebuyers and mortgage lenders: It can safeguard them against unexpected issues, such as ownership disputes, liens and other legal claims resulting from a previous owner’s actions. In the event of a dispute arising during or after a sale, the title insurance company may be liable for covering specified legal damages. Lenders often require title insurance as a condition of issuing a mortgage to a borrower.

Underwriting

Mortgage underwriting is the review process a lender completes to decide whether you qualify for a loan. As part of this detailed review, a lender assesses various factors, including your credit history and score, and your full financial profile. A home appraisal is also conducted as part of the underwriting phase. Often, lenders will follow underwriting guidelines set by Fannie Mae and Freddie Mac.

USDA loan

USDA loans (aka rural development loans) are offered to people willing to buy homes in certain rural areas. Issued by private lenders, they are guaranteed by the U.S. Department of Agriculture. They offer generous terms — they don’t require a down payment, for example — but applicants must be low- or moderate-income to qualify.

VA loan

VA loans are guaranteed by the U.S. Department of Veterans Affairs. Both active-duty and veteran military members, as well as surviving spouses, are eligible to apply. VA loans are appealing because they don’t require a down payment, have no loan limits and can be 100-percent financed (assuming the borrower has full entitlement).