Mortgage Glossary
Learn the essential mortgage terms and definitions. Understanding these terms helps you make better decisions when buying a home or refinancing.
Buying a home involves a lot of unfamiliar terminology. This glossary covers the most common mortgage terms you'll encounter during the homebuying process. Whether you're a first-time buyer or refinancing, bookmark this page for quick reference.
For interactive tools that put these terms into practice, try our mortgage calculator, affordability calculator, or closing cost calculator.
Amortization
The process of spreading loan payments over time. Early payments go mostly to interest, while later payments go mostly to principal. See our amortization guide for a detailed explanation with examples.
APR
Annual Percentage Rate. The true yearly cost of borrowing, including interest and fees. APR is always higher than the interest rate and gives you a more complete picture of loan cost.
ARM
Adjustable Rate Mortgage. A loan with an interest rate that can change over time based on market conditions. ARMs typically start with a lower fixed rate for 5, 7, or 10 years before adjusting.
Closing Costs
Fees paid at the end of a real estate transaction, typically 2-5% of the loan amount. Includes appraisal, title insurance, origination fees, and prepaid items like taxes and insurance.
Debt-to-Income Ratio (DTI)
Your monthly debt payments divided by your gross monthly income. Lenders use this to determine how much you can borrow. Most lenders prefer DTI under 43%.
Equity
The portion of your home you actually own. Calculated as home value minus mortgage balance. Build equity through mortgage payments, home improvements, or appreciation.
Escrow
An account where money is held by a third party (usually the lender) to pay for property taxes and insurance. Your monthly payment includes an escrow portion for these expenses.
Fixed-Rate Mortgage
A loan with an interest rate that stays the same for the entire loan term. Provides predictable monthly payments and protection from rate increases.
Home Appraisal
An estimate of a home's market value conducted by a licensed professional. Required by lenders before approving a mortgage to ensure the property is worth the loan amount.
Interest Rate
The percentage of the loan amount that the lender charges for borrowing money. Your interest rate is determined by your credit score, down payment, loan type, and market conditions.
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans typically have stricter credit requirements and may carry higher rates.
Loan-to-Value Ratio (LTV)
The loan amount divided by the home's value, expressed as a percentage. Lower LTV means more equity and better loan terms. An 80% LTV means you have 20% equity.
Mortgage Insurance (PMI)
Insurance that protects the lender if you default. Required when down payment is less than 20%. Can be removed once you reach 20% equity on conventional loans.
P&I
Principal and Interest. The main components of a mortgage payment. Principal reduces your loan balance; interest is the cost of borrowing.
Pre-Approval
A lender's estimate of how much you can borrow, based on your financial information. More formal than pre-qualification and shows sellers you're a serious buyer.
Principal
The original loan amount, or the remaining balance of the loan. Each payment reduces the principal, building your equity over time.
Refinancing
Replacing your current mortgage with a new one, typically to get a lower rate, different term, or cash out equity. Use our refinance calculator to see if it makes sense.
Title Insurance
Insurance that protects against defects in the title to real property. Required by most lenders and protects your ownership rights.
Frequently Asked Questions
What is the most important mortgage term to understand? APR (Annual Percentage Rate) is arguably the most important because it includes both the interest rate and fees, giving you the true cost of the loan. Always compare APR when shopping for mortgages.
What does LTV mean? LTV (Loan-to-Value) is the loan amount divided by the home's value. An 80% LTV means you're borrowing 80% and have 20% equity. Lower LTV gets better rates and avoids PMI.
When can I remove PMI? You can request PMI removal when your loan balance reaches 80% of the original home value. Lenders must automatically cancel PMI at 78%. You can also request removal if your home appreciates to 80% of current value.