Mortgage Glossary — Plain-English Home Buying Terms

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Adjustable-rate mortgage (ARM): A loan whose interest rate is fixed for an initial period, then adjusts periodically with the market. Lower to start, but the payment can rise later.
Amortization: The schedule by which your loan is paid off over time. Early payments are mostly interest; later ones are mostly principal.
Annual percentage rate (APR): The yearly cost of a loan including the interest rate plus most lender fees, expressed as a percentage. Useful for comparing offers.
Appraisal: A licensed appraiser's independent estimate of a home's market value. Lenders require it to confirm the home is worth the loan amount.

Closing costs: The fees and prepaid items due at closing — lender charges, title, taxes, and insurance — typically 2–5% of the loan amount.
Closing Disclosure: A standardized form detailing your final loan terms and costs, provided at least three business days before closing so you can review it.
Conforming loan: A mortgage that meets the limits and standards set by Fannie Mae and Freddie Mac, which usually means more competitive pricing.
Contingency: A condition in a purchase contract that must be met for the sale to proceed — common ones cover financing, inspection, and appraisal.
Conventional loan: A mortgage not backed by a government program like FHA or VA. Often requires stronger credit but avoids some government-loan fees.
Credit score: A number summarizing your credit risk. Mortgage lenders use it to set your rate tier — higher scores generally earn lower rates.

Debt-to-income ratio (DTI): Your monthly debt payments divided by your gross monthly income. Lenders use it to judge how much you can comfortably borrow.
Down payment: The portion of the purchase price you pay upfront in cash. A larger down payment can lower your rate and remove mortgage insurance.

Earnest money: A good-faith deposit made with your offer to show you're serious. It's typically credited toward your costs at closing.
Equity: The share of your home you actually own — its value minus what you still owe. It grows as you pay down the loan and as values rise.
Escrow: A neutral third party that holds funds during a transaction, and the account a servicer uses to pay your taxes and insurance over time.

FHA loan: A mortgage insured by the Federal Housing Administration, designed for buyers with smaller down payments or shorter credit histories.
Fixed-rate mortgage: A loan whose interest rate — and principal-and-interest payment — stays the same for the entire term.

Hard inquiry: A check of your credit when you apply for new credit. It can lower your score slightly; rate-shopping within a short window counts as one.

Loan estimate: A standardized three-page form a lender gives you after you apply, laying out the estimated rate, payment, and closing costs.
Loan-to-value ratio (LTV): The loan amount divided by the home's value. A lower LTV (bigger down payment) usually means better pricing and no PMI.

Mortgage insurance (PMI/MIP): Insurance that protects the lender if you stop paying, commonly required when your down payment is under 20%. It adds to your monthly cost.

Origination fee: What a lender charges to process and underwrite your loan, usually a percentage of the amount borrowed.

Points (discount points): An optional upfront fee — one point is 1% of the loan — paid to lower your interest rate. Worth it if you'll keep the loan long enough.
Pre-approval: A lender's written estimate of what they'll lend you after reviewing your finances. It makes your offers far more credible to sellers.
Principal: The amount you borrow, separate from interest. Each payment chips away at it, building your equity.
Private mortgage insurance (PMI): Mortgage insurance on conventional loans with less than 20% down. It can usually be removed once you reach 20% equity.

Rate lock: A lender's commitment to hold a quoted interest rate for a set period while your loan is processed, protecting you from rate swings.
Refinance: Replacing your existing mortgage with a new one — often to get a lower rate, change the term, or tap equity.

Title: Legal ownership of the property. A title search and title insurance confirm the seller can sell and protect you from past claims.

Underwriting: The lender's review of your income, assets, credit, and the property to decide whether — and on what terms — to approve the loan.

VA loan: A mortgage guaranteed by the Department of Veterans Affairs for eligible service members and veterans, often with no down payment.