Glossary of Key Mortgage and Loan Terms

This guide simplifies the key terms you’ll encounter in real estate, home buying, and mortgages. Getting familiar with these terms will help you navigate the process with confidence and make informed decisions.

A

Adjustable-Rate Mortgage (ARM)

A loan where the interest rate adjusts periodically based on market conditions. Initially, the rate may be lower than fixed-rate mortgages, but it can increase or decrease over time, which may result in higher monthly payments.

Amortization

The process of gradually paying off a loan with regular payments that include both principal and interest, spreading the cost over time.

Annual Percentage Rate (APR)

The yearly cost of your mortgage, including interest and fees, helping you compare different loan offers.

Appraisal

An estimate of a property’s value, done by a professional appraiser to ensure the loan amount is appropriate.

Appreciation

When a property increases in value over time, often due to market conditions or improvements made to the home.

Assessment

A value placed on a property for tax purposes, determined by the local government.

Assumable Mortgage

A mortgage that may be transferred from the seller to the buyer, subject to lender approval. Not all mortgages are assumable, and buyers should verify terms and eligibility with the lender.

Asset

Any valuable property or possession, such as savings, real estate, or investments, that can be used to secure a loan.

B

Balloon Mortgage (ARM)

A mortgage with small payments for a set period, followed by a large payment to pay off the balance.

Bridge Loan

A short-term loan used to bridge the gap between buying a new home and selling your old one.

Broker

A licensed professional who arranges the transaction between the buyer and seller, typically charging a commission.

Buyer’s Market

When there are more homes for sale than buyers, often leading to lower prices and more negotiation power for buyers.

C

Cap

A limit on how much the interest rate can change on an ARM, protecting you from large increases.

Cash Reserves

Money saved to cover mortgage payments if needed, providing a financial cushion.

Closing

The final step in buying a home where the property is transferred to the buyer, and all paperwork is signed.

Closing costs

Fees paid at the closing, including loan fees, title insurance, and taxes, typically 2-5% of the home’s purchase price.

Comparative Market Analysis (CMA)

A report comparing similar homes to determine a property’s value, helping you make an informed offer.

Contingency

A condition that must be met for the sale to go through, like a home inspection or financing approval.

Conventional Loan

A standard loan not insured by the government, often requiring a higher credit score and down payment.

Convertible ARM

An adjustable-rate mortgage that can be changed to a fixed-rate mortgage, offering flexibility.

Co-op (Cooperative)

A building owned by a corporation where residents buy shares, rather than owning their individual units.

Counteroffer

A new offer made in response to an initial offer, often with different terms or price.

D

Debt-to-Income Ratio (DTI)

The percentage of your income that goes toward debt payments, used by lenders to determine your ability to repay the loan.

Deed

A legal document that transfers property ownership from the seller to the buyer.

Deed-in-Lieu of Foreclosure

An agreement that involves a borrower voluntarily transferring their property to the lender to avoid foreclosure. While sometimes perceived as a less severe option, it still results in a substantial negative impact on your credit history, comparable to that of a foreclosure. This can affect your future loan eligibility and credit status.

Default

Failing to make mortgage payments as agreed, potentially leading to foreclosure.

Delinquency

Fees paid to reduce your mortgage interest rate, often lowering your monthly payment.

Down Payment

The initial cash payment made when buying a home, typically 3-20% of the purchase price.

Due Diligence

The time period for the buyer to inspect the property and finalize the purchase, ensuring there are no surprises.

E

Earnest Money Deposit

A deposit made to show the buyer’s commitment to the purchase, often applied to the down payment or closing costs.

Easement

The right to use someone else’s property for a specific purpose, like a driveway or utilities.

Encumbrance

A claim or lien on a property, which can affect ownership and use.

Equity

The difference between what you owe on your mortgage and your home’s value, representing your ownership stake.

Escrow

An account where money is held by a third party until certain conditions are met, often used for taxes and insurance.

Exclusive Listing

An agreement where only one real estate agent can sell the property, usually for a specified period.

F

Fair Market Value

The price a property would sell for in an open market, based on comparable sales and market conditions.

Fannie Mae (FNMA)

A government-sponsored enterprise that buys and guarantees mortgages, helping to make home loans more available.

Federal Housing Administration (FHA) Loan

A loan insured by the FHA, often for first-time buyers with lower down payments and credit scores.

Fixed-Rate Mortgage

A mortgage with an interest rate that stays the same for the entire loan term, providing predictable payments.

Foreclosure

The process where a lender takes back a property due to missed payments, often resulting in the sale of the home.

Freddie Mac (FHLMC)

A government-sponsored enterprise that buys and guarantees mortgages, similar to Fannie Mae.

G

Good Faith Estimate (GFE)

An estimate of closing costs provided by the lender, helping you understand the total cost of your loan.

H

Hazard Insurance

Insurance that protects against property damage from fire, storms, etc., often required by lenders.

Home Equity Line of Credit (HELOC)

A line of credit based on the equity in your home, allowing you to borrow as needed.

Home Inspection

An examination of a property’s condition by a professional inspector, identifying any issues or repairs needed.

Homeowners Association (HOA)

An organization that manages a community and enforces rules, often charging fees for maintenance and amenities.

Homeowners Insurance

Insurance that covers damage to your home and belongings, often required by lenders.

Housing Ratio

The percentage of your income that goes toward housing costs, used by lenders to determine affordability.

I

Interest Rate

The cost of borrowing money, expressed as a percentage of the loan amount, affecting your monthly payment.

Interest-Only Loan

A loan where you only pay the interest for a set period, with principal payments beginning later.

J

Jumbo Loan

A large loan that exceeds conforming loan limits, often with stricter requirements and higher interest rates.

L

Lien

A legal claim against a property for unpaid debts, which must be paid off before selling the property.

Loan Estimate

A document from the lender detailing the loan terms and closing costs, helping you compare offers.

Loan-to-Value Ratio (LTV)

The percentage of the home’s value that you’re borrowing, used by lenders to assess risk.

Lock-In Period

The time during which the interest rate on a loan is fixed, protecting you from rate increases before closing.

M

MLS (Multiple Listing Service)

A database of properties for sale used by real estate agents to find and list homes.

Mortgage Insurance Premium (MIP)

Insurance required for FHA loans to protect the lender in case of default, usually part of your monthly payment.

Mortgage Note

A document that outlines the terms of your mortgage, including the amount, interest rate, and repayment schedule.

Mortgage Underwriter

The person who evaluates and approves or denies your loan application based on your financial information.

N

Net Proceeds

The amount of money the seller receives after all costs are paid, including the mortgage balance and closing costs.

No-Documentation Loan

A type of loan that requires minimal proof of income, is not available to all borrowers, and carries higher interest rates and stringent approval conditions. These loans are less common and generally riskier, potentially leading to higher long-term costs. Borrowers should carefully consider whether this type of loan aligns with their financial situation.

O

Origination Fee

A fee charged by the lender for processing the loan, usually a percentage of the loan amount.

P

PITI (Principal, Interest, Taxes, and Insurance)

The components of a monthly mortgage payment, covering the loan and other costs.

PMI (Private Mortgage Insurance)

Insurance required for conventional loans with low down payments, protecting the lender if you default.

Points

Fees paid to the lender to reduce the interest rate on a loan, often lowering your monthly payment.

Power of Attorney

A legal document allowing one person to act on behalf of another, often used in real estate transactions.

Pre-Approval

A lender’s conditional approval for a loan based on your financial information, giving you a better idea of your budget.

Pre-Qualification

An initial assessment of how much you can borrow based on your income and debts, often less detailed than pre-approval.

Prepayment Penalty

A fee charged for paying off a loan early, sometimes included in loan terms to protect the lender’s interest.

Principal

The original loan amount, not including interest, represents the debt you owe.

R

Rate Lock

An agreement to keep the interest rate the same for a set period, protecting you from rate increases before closing.

Real Estate Agent

A licensed professional who helps buy and sell properties, guiding you through the process.

Real Estate Owned (REO)

Property owned by a lender after foreclosure.

Recording Fee

A fee for officially recording the property sale with the local government.

Refinance

Replacing your current loan with a new one, usually with better terms.

Reverse Mortgage

A loan option available to homeowners aged 62 and older, allowing them to convert part of their home equity into cash. This loan requires repayment when the homeowner passes away or moves out permanently. It is essential to note that a reverse mortgage can significantly reduce the value of the estate left to heirs. Potential borrowers should discuss with a financial advisor to fully understand the long-term implications.