Mortgage Glossary

63 mortgage terms defined in plain English — each one linked to the calculator that turns it into a number for your loan.

A

Adjustable-Rate Mortgage (ARM): A mortgage whose rate is fixed for an introductory period and then resets on a schedule. The name tells you the schedule: a 5/1 ARM is fixed for five years then adjusts annually, and a 7/6 ARM is fixed for seven years then adjusts every six months. Caps limit how far the rate can move at the first adjustment, at each later adjustment, and over the life of the loan. Compare an ARM against a fixed rate →
Amortization: The process of paying off a loan through equal payments that cover the interest owed that month, with whatever is left reducing the balance. Early payments are mostly interest because the balance is large; late payments are mostly principal. Nothing about your payment changes — only the split inside it does. See your month-by-month amortization schedule →
Annual Percentage Rate (APR): The interest rate plus the lender fees that federal law counts as finance charges, restated as a single annualized rate. APR is always equal to or higher than the note rate, and it assumes you hold the loan to maturity — which is why it misleads anyone who plans to sell or refinance early. See how fees push APR above your rate →
Appraisal: A licensed appraiser's opinion of what the home is worth, ordered by the lender to make sure the collateral covers the loan. If the appraisal comes in below the contract price, the lender lends against the lower number and the gap becomes cash you must bring, renegotiate, or walk away from.
Appreciation: The increase in a home's market value over time. It is the part of your return that has nothing to do with your payments — and the only source of equity growth during an interest-only period. Appreciation is not guaranteed, and any honest rent-versus-buy comparison tests what happens when it stalls. Test buying against renting →
Assumable Mortgage: A loan a buyer can take over from the seller, keeping the original rate and balance. FHA, VA, and USDA loans are generally assumable with lender approval; conventional loans usually are not, because a due-on-sale clause lets the lender demand full repayment when the property changes hands. Assuming a low-rate loan still requires financing the seller's equity separately.

B

Back-End Ratio: All of your monthly debt payments — the housing payment plus car loans, student loans, credit card minimums, and child support — divided by gross monthly income. It is the ratio lenders weigh most heavily, and it is the second number in the 28/36 rule. Calculate your DTI →
Balloon Payment: A large lump sum due at the end of a loan whose regular payments were too small to retire the balance. The borrower must refinance, sell, or pay it in cash on a fixed date, regardless of what rates or home values are doing that year.
Bi-Monthly Payment: Half a mortgage payment paid twice a month, on fixed calendar dates. Twenty-four half payments equal twelve monthly payments, so unlike a biweekly schedule this adds no thirteenth payment — the savings come only from paying part of the balance a couple of weeks early. Compare bi-monthly against biweekly →
Biweekly Payment: Half a mortgage payment paid every two weeks. Because there are 26 two-week periods in a year, you make 13 full payments instead of 12 — one extra payment a year, applied entirely to principal, which shortens the loan by years. See what biweekly payments save →

C

Cash-Out Refinance: Replacing your mortgage with a larger one and taking the difference in cash. You re-price the entire balance at today's rate, which is expensive when your existing rate is low — the reason many owners tap equity with a second lien instead. Compare a cash-out refi against a HELOC →
Closing Costs: The fees due at closing, split between lender charges (origination, points, credit report) and third-party charges (appraisal, title insurance, recording, prepaid taxes and insurance). Only some of them appear in the APR, which is why two loans with identical APRs can cost different amounts to close. Estimate your closing costs →
Closing Disclosure: The five-page form itemizing your final loan terms, payment, and cash to close. Federal rules require the lender to deliver it at least three business days before closing, giving you time to compare it against the Loan Estimate you were issued at application.
Conforming Loan: A loan small enough — and underwritten to standards strict enough — for Fannie Mae or Freddie Mac to buy. The 2026 baseline limit for a one-unit home is $832,750 across most of the country, with a higher ceiling in designated high-cost areas. The limits reset annually, so a loan that was jumbo at origination may be conforming today. Check whether your loan clears the limit →
Construction Loan: Short-term financing that funds a build in draws as work is completed, with interest charged only on the money drawn so far. It converts to — or is refinanced into — a permanent mortgage when the home is finished. Model the draw schedule and payments →

D

Debt-to-Income Ratio (DTI): Your monthly debt payments as a percentage of your gross monthly income. It is the single number most likely to decide whether you are approved and for how much, because it measures capacity to pay rather than willingness — which is what a credit score measures. Calculate your front-end and back-end DTI →
Deed of Trust: In many states, the instrument that secures your loan against the property, holding legal title with a trustee until the debt is repaid. It does the same job a mortgage does in the remaining states; the practical difference shows up in how a foreclosure proceeds.
Discount Points: Money paid at closing to lower the interest rate. One point costs 1% of the loan amount. Points pay for themselves only if you keep the loan past the breakeven month, where the accumulated payment savings finally exceed what you handed over up front. Find the breakeven month on points →
Down Payment: The cash you put toward the purchase price. It sets your loan-to-value ratio, and therefore whether you pay mortgage insurance. Twenty percent is the threshold that avoids PMI on a conventional loan, not a minimum — conventional loans start at 3% down, FHA at 3.5%, and VA and USDA at zero. See what each down payment changes →

E

Earnest Money: A good-faith deposit made when your offer is accepted, held by a neutral third party and credited toward your down payment and closing costs at closing. Contract contingencies — financing, appraisal, inspection — govern whether you get it back if the deal collapses.
Equity: The home's market value minus what you owe against it. It grows two ways: appreciation, which the market controls, and principal reduction, which you control. Lenders let you borrow against it, but only down to a maximum combined loan-to-value they set.
Escrow Account: An account your servicer uses to collect property taxes and homeowners insurance with each mortgage payment, then pay those bills when due. It is why your payment changes even on a fixed-rate loan: the tax bill moves, the escrow payment follows. Federal rules cap the cushion the servicer may hold at two months of escrow payments. See how a tax change moves your payment →
Extra Principal Payment: Any payment above the scheduled amount, applied directly to the balance. Because interest is charged on the balance, a dollar of principal paid today erases every future dollar of interest that would have accrued on it — which is why early extra payments are worth far more than late ones. See what one extra payment a year saves →

F

FHA Loan: A mortgage insured by the Federal Housing Administration, allowing 3.5% down with a credit score of 580 (or 10% down from 500). The trade is mortgage insurance: a 1.75% upfront premium plus an annual premium that lasts the life of the loan when you put less than 10% down. Price an FHA loan with MIP included →
Fixed-Rate Mortgage: A loan whose interest rate never changes, so the principal-and-interest portion of the payment is identical in month one and month 360. Taxes, insurance, and PMI can still move the total payment. Calculate a fixed-rate payment →
Forbearance: A temporary, lender-approved pause or reduction in payments during a hardship. Interest generally keeps accruing, and the skipped amounts still have to be repaid — as a lump sum, spread across later payments, or moved to the end of the loan.
Front-End Ratio: Your total housing payment — principal, interest, taxes, insurance, mortgage insurance, and HOA dues — divided by gross monthly income. It is the first number in the 28/36 rule. Find the price your ratios support →

G

Gift Funds: Down payment money from a relative or other approved source, documented with a gift letter stating that no repayment is expected. Lenders trace where the money came from and how long it has been in your account, so a gift deposited days before closing draws more scrutiny than one that has been sitting for months. Set a monthly savings target instead →

H

Home Equity Line of Credit (HELOC): A revolving credit line secured by your home. During the draw period you borrow what you need and typically pay interest only; when it ends, the balance amortizes over the repayment period and the payment jumps. The rate is usually variable, so the payment moves with the index. Model the draw and repayment periods →
Home Inspection: A buyer-ordered examination of the home's condition — roof, foundation, systems — performed before closing. It is not the appraisal, it is not required by the lender, and it exists to inform you rather than to protect the lender's collateral. See typical inspection costs →
Homeowners Association (HOA) Dues: Mandatory fees paid to the association that maintains shared property in a condo, townhome, or planned community. They are not part of PITI and are rarely escrowed, but lenders count them in your housing ratio — so they reduce how much house you qualify for, dollar for dollar.
Homeowners Insurance: The hazard policy your lender requires you to carry on the collateral, usually paid through escrow. It covers damage to the structure and is separate from title insurance, flood insurance, and mortgage insurance — three things it is routinely confused with.
Housing Ratio (28/36 Rule): The conventional underwriting guideline that your housing payment stay under 28% of gross monthly income and your total debt payments under 36%. Both tests apply, so the more restrictive one sets your maximum. Individual loan programs and automated underwriting routinely allow higher ratios with compensating factors. Apply the 28/36 rule to your income →

I

Index and Margin: The two halves of an ARM's rate after it adjusts. The index is a published market rate that moves; the margin is a fixed spread your lender adds to it and never changes. Index plus margin is the fully indexed rate, subject to the loan's caps.
Interest-Only Mortgage: A loan whose required payment covers only accrued interest for an introductory period, leaving the balance untouched. When the period ends, the full original balance re-amortizes over the years that remain, so the payment lands above what a plain amortizing loan of the same size would have charged all along. Measure the payment shock →

J

Jumbo Loan: A mortgage larger than the conforming limit — $832,750 in most counties for 2026 — which Fannie Mae and Freddie Mac cannot buy. Lenders keep the risk or sell it privately, so expect stricter credit, income, and reserve requirements than an agency loan. Price a jumbo loan →

L

Lien: A legal claim against the property securing a debt. Position matters: the first lien is repaid first in a foreclosure, which is why a second mortgage or HELOC carries a higher rate than the first even though the collateral is identical.
Loan Estimate: The standardized three-page form a lender must deliver within three business days of your application, listing the rate, payment, and closing costs. Because every lender uses the same form, stacking two or three Loan Estimates side by side is the most reliable way to compare offers.
Loan Term: The number of years you have to repay the loan. A shorter term carries a lower rate and a higher payment, and costs dramatically less interest overall — the trade-off between a 15-year and a 30-year mortgage in a single variable. Compare 15-year and 30-year terms →
Loan-to-Value Ratio (LTV): The loan balance divided by the home's value. It is the lender's measure of cushion, and it drives your rate, whether you owe mortgage insurance, and how much equity you can borrow against. An 80% LTV — 20% down — is the line where conventional PMI stops. See the LTV each down payment produces →

M

Mortgage Insurance Premium (MIP): The insurance FHA borrowers pay: 1.75% of the loan up front, plus an annual premium collected monthly. Unlike conventional PMI, annual MIP lasts the life of the loan when you put less than 10% down — which is why FHA borrowers often refinance into a conventional loan once they hold 20% equity. Compare PMI, MIP, and the VA funding fee →
Mortgage Servicer: The company that collects your payment, runs your escrow account, and handles hardship requests. It is often not the lender that originated the loan, and servicing rights can be sold without your consent — the loan terms cannot change when they are.

N

Negative Amortization: What happens when a payment is smaller than the interest owed: the shortfall is added to the balance, so the debt grows while you pay. Federal ability-to-repay rules exclude negatively amortizing loans from the Qualified Mortgage definition.

O

Origination Fee: The lender's charge for processing and underwriting the loan, quoted as a percentage of the loan amount. It is a finance charge, so it lifts the APR — unlike third-party fees such as the appraisal or title search.

P

Piggyback Loan (80/15/5): Two loans closed at once so the first mortgage stays at 80% LTV and no mortgage insurance is owed. An 80/15/5 pairs an 80% first with a 15% second and 5% down; an 80/10/10 uses 10% and 10%. The second lien carries a higher rate, so the structure wins only when that rate costs less than the PMI it avoids. Compare a piggyback against paying PMI →
PITI: Principal, Interest, Taxes, and Insurance — the four components of a full mortgage payment, and the number underwriters use. A calculator that returns only principal and interest understates what you will actually pay every month. Calculate a full PITI payment →
Pre-Approval: A lender's conditional commitment to lend a stated amount, issued after pulling your credit and verifying income and assets against documents. Pre-qualification is the weaker cousin — an estimate based on numbers you volunteered, with nothing checked. Sellers know the difference. Work through the pre-approval steps →
Prepayment Penalty: A fee for paying the loan off early, usually triggered by a refinance or sale within the first few years. Federal rules bar them on FHA, VA, USDA, and adjustable-rate qualified mortgages, and cap them tightly on fixed-rate qualified mortgages. Check the note before assuming a loan has none.
Principal: The amount you borrowed and still owe, excluding interest. Every dollar of principal you retire stops accruing interest permanently, which is the entire mechanism behind extra payments, biweekly schedules, and recasting.
Private Mortgage Insurance (PMI): Insurance that protects the lender, not you, when a conventional loan exceeds 80% LTV. You may request cancellation once the balance reaches 80% of the home's original value, and the servicer must terminate it automatically at 78% under the Homeowners Protection Act. The premium is priced to your credit score and down payment. Estimate your PMI and its drop-off date →
Property Tax: An annual levy assessed by local governments as a percentage of your home's assessed value, usually collected monthly through escrow. Rates vary enormously by state and county, so identical homes in two markets can carry monthly payments hundreds of dollars apart on taxes alone. Estimate property tax by state →

R

Rate Lock: A lender's commitment to hold your quoted rate for a set window, usually 30 to 60 days, while the loan is processed. Locks can expire before closing, and extending one typically costs money — a reason closing delays are expensive in a rising-rate market.
Recast: Paying a lump sum toward principal and having the lender re-amortize the remaining balance over the remaining term, which lowers the monthly payment. The rate and payoff date do not change, and the fee is far smaller than refinancing — but government-backed loans generally do not allow it. See how much a recast lowers the payment →
Refinance: Replacing your existing mortgage with a new one, usually to cut the rate, change the term, or pull out cash. It resets amortization and costs money to close, so the question is never the rate alone — it is whether you keep the new loan past the breakeven month. Find your refinance breakeven →
Reserves: Liquid assets left after closing, measured in months of full PITI payments. Agency loans ask for few or none on a primary residence; jumbo, investment, and second-home loans routinely require several months' worth.

S

Second Home Mortgage: Financing on a property you occupy part of the year but do not rent out full time. Lenders price it above a primary residence and below an investment property, and they enforce occupancy rules — renting it out year-round makes it an investment property, with worse terms. Price a second-home loan →
Second Mortgage: Any loan secured by a home that already carries a first mortgage — a home equity loan, a HELOC, or the second lien in a piggyback. It sits behind the first in a foreclosure, which is the whole reason its rate is higher. Calculate a second-mortgage payment →
Seller Concessions: Closing costs the seller agrees to pay on your behalf, often in exchange for a higher price. Each loan program caps them as a percentage of the price, and the cap tightens as your down payment shrinks.

T

Title Insurance: A one-time policy protecting against defects in the property's ownership history — an unrecorded lien, a forged deed, a missed heir. The lender's policy is required and covers only the lender's interest; the owner's policy is optional and covers yours.
Truth in Lending Act (TILA): The 1968 federal law that forces lenders to disclose the cost of credit in a standardized way, and the reason every mortgage offer carries an APR alongside its interest rate. It defines which fees count as finance charges — and therefore which ones the APR includes. See which fees the APR captures →

U

Underwriting: The lender's verification of your income, assets, credit, and the property's value against program guidelines, ending in an approval, a denial, or an approval with conditions. Conditional approvals are normal; the conditions are usually documents.
USDA Loan: A zero-down mortgage guaranteed by the Department of Agriculture for buyers in eligible rural and suburban areas who meet income limits. There is no PMI; instead there is a 1% upfront guarantee fee and a 0.35% annual fee. Price a USDA loan with both fees →

V

VA Loan: A mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. It allows zero down and charges no mortgage insurance at all. A one-time funding fee applies instead, varying with down payment and prior use, and it is waived for borrowers receiving compensation for a service-connected disability. Price a VA loan with the funding fee →

The Six Terms That Actually Decide Your Payment

Most of the vocabulary above describes paperwork. Six terms describe money, and they are the ones worth understanding before you talk to a lender: LTV decides whether you pay mortgage insurance. DTI decides how much you can borrow. Loan term decides how much total interest you pay. Points decide whether you pay for a lower rate up front. APR tells you what the fees are really costing. And escrow explains why your fixed-rate payment isn't actually fixed.

Everything else — the deed of trust, the servicer, the Closing Disclosure — is machinery you will meet once and never think about again.

Terms That Get Confused

Interest rate vs. APR. Your payment is computed from the interest rate. The APR is a summary statistic that folds in fees; you are never charged the APR.
PMI vs. MIP vs. homeowners insurance. The first two protect the lender if you default — PMI on conventional loans, MIP on FHA. Homeowners insurance protects the house. Only the third protects you.
Appraisal vs. inspection.The appraisal protects the lender's collateral and is required. The inspection protects the buyer and is optional.
Pre-qualification vs. pre-approval. One is an estimate from numbers you volunteered. The other is a conditional commitment backed by verified documents.
Recast vs. refinance.A recast keeps your rate and shrinks the payment after a lump sum. A refinance replaces the loan entirely, at today's rate and today's closing costs.

Frequently Asked Questions

What does amortization mean?

Amortization is the schedule by which a loan is repaid through equal payments. Each payment covers the interest that accrued that month, and whatever is left over reduces the balance. Because interest is charged on the outstanding balance, early payments are mostly interest and late payments are mostly principal — even though the payment itself never changes on a fixed-rate loan.

What is escrow in a mortgage?

Escrow means two different things in a home purchase. At closing, escrow is a neutral third party holding funds and documents until both sides perform. After closing, an escrow account is where your servicer accumulates the property tax and homeowners insurance portions of your monthly payment and pays those bills when they come due. The second meaning is why a fixed-rate payment can still change from year to year: the tax bill moves, and the escrow portion follows it.

What does APR mean on a mortgage?

APR restates your interest rate plus the lender fees that federal law counts as finance charges as a single annualized percentage. It exists so a low headline rate cannot hide expensive points and origination fees. Its blind spot is time: APR spreads those fees across the full loan term, so if you sell or refinance early, your true cost is higher than the disclosed APR suggests.

What is PMI and when does it go away?

Private mortgage insurance protects the lender on a conventional loan with less than 20% down. Under the Homeowners Protection Act you can request cancellation once your balance falls to 80% of the home's original value, and the servicer must cancel it automatically at 78%. FHA mortgage insurance works differently — with less than 10% down it lasts the life of the loan, so FHA borrowers typically refinance to shed it.

What does LTV mean?

Loan-to-value is the loan balance divided by the home's value, expressed as a percentage. A $320,000 loan on a $400,000 home is 80% LTV. Lenders use it to measure their cushion, and it determines your rate, whether you owe mortgage insurance, and how much equity you can borrow against later.

What is a good debt-to-income ratio for a mortgage?

The conventional guideline is the 28/36 rule: housing costs under 28% of gross monthly income, total debt payments under 36%. Both tests apply and the stricter one governs. Automated underwriting and government-backed programs regularly approve higher back-end ratios when there are compensating factors such as strong reserves, a large down payment, or a high credit score.

Put a Number on the Vocabulary

Definitions only go so far. Enter your loan in the main calculator to see the PITI payment, the amortization split, and what the terms above cost you every month.

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