Commonly Used Mortgage Terms Defined

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We get it. Sometimes it can feel like your lender is speaking another language. No matter what your mortgage needs are, we want to help ease the process by going over a few of the terms you can expect to hear when refinancing or purchasing a home. You can find the definitions to some of the most common terms below:

  • Adjustable Rate Mortgage (ARM) – a home loan with an interest rate that can change, causing monthly payments to go up and down.
  • Annual Percentage Rate (APR) – the approximate yearly cost of borrowing money from a financial institution. APR combines the total amount of interest payable and the cost of other fees and charges, averaged over the term of the loan and expressed as a percentage.
  • Amortization – refers to spreading payments over multiple periods.
  • Cash-Out Refinance – the refinancing of an existing mortgage loan, where available equity is taken out of the home and added to the current loan balance; typically used for debt consolidation or home improvement.
  • Closing Costs – the added fees paid from the borrower on the day of closing.
  • Credit Report – a detailed report of an individual’s credit history.
  • Credit Score – a number that defines an individual’s capacity to repay a loan.
  • Debt Consolidation – when a new loan is used to pay off numerous debts. This new loan combines the debts creating one monthly payment and one interest rate.
  • Debt to Income Ratio (DTI) – a way to determine the individual’s ability to manage monthly payments. DTI is calculated by dividing total recurring monthly debt by gross monthly income and is expressed as a percentage.
  • Down Payment – the initial payment that is made on the home before determining the loan amount.
  • Earnest Money – the money paid to confirm a contract.
  • Equity – the value of a mortgaged property after deduction of charges against it.
  • Escrow – an account set up so the individual can pay their property taxes and insurance together and is added to the monthly mortgage payment.
  • Fannie Mae and Freddie Mac – government-sponsored enterprises (GSEs) that don’t service their own mortgages, but they guarantee most mortgages within the U.S., providing stability and affordability in the housing market.
  • FHA Loan – a type of mortgage loan created to help low-income borrowers buy homes without having to put down a lot of money up front. 
  • Fixed Rate Mortgage – a home loan with a set interest rate for the life of the loan.
  • Interest Rate – the percentage of a loan that is charged in addition to the original loan itself.
  • Loan to Value (LTV) – the ratio of the mortgage loan compared to the appraised value of the property, represented as a percentage.
  • Mortgage – a legal agreement where a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.
  • Mortgage Broker – an intermediary working with a borrower and a lender while qualifying the borrower for a mortgage.
  • Mortgage Insurance (MI) – an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.
  • Pre-approval – a letter written by the lender stating that the borrower is eligible to qualify for a mortgage loan, listing the amount the client is able to borrow.
  • Principal – the outstanding balance of your mortgage.
  • Rate Lock – an agreement between a borrower and a lender that the borrower is protected from potential rate increases during a specific amount of time.
  • Rate/Term Refinance – the refinancing of an existing mortgage to the interest rate and/or term of a mortgage without advancing new money on the loan.
  • Refinance – to revise the terms of an existing mortgage by either changing the term, lowering the rate, or by getting cash out.
  • Second mortgage – a mortgage taken out on a property that is already mortgaged.
  • Underwriting – assessing the risk a lender runs when loaning you money, thus guaranteeing payment in case loss or damage occurs.
  • USDA Loan – zero-down-payment mortgages offered for rural property owners by the U.S. Department of Agriculture.
  • VA Loan – a mortgage loan in the United States guaranteed by the United States Department of Veteran Affairs. The basic intention of the VA home loan program is to supply home financing to eligible veterans and to help veterans purchase properties with no down payment. The loan may be issued by qualified lenders.

 

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Originally published August 3, 2018, updated August 24, 2022.