Mortgage Glossary

Understanding mortgage terms can simplify the home financing process. Our comprehensive glossary provides clear definitions of common mortgage terms to help you make informed decisions. Whether you’re a first-time homebuyer or refinancing, this resource clarifies terminology and guides you through every step of your home financing journey. Explore the glossary to enhance your mortgage knowledge and feel more confident in your home buying process.

Mortgage Terminology

Amortization Term

The length of time required to amortize the mortgage loan, expressed as a number of months. For example, 360 months of payments is the amortization term for a 30-year fixed-rate mortgage.

Annual Percentage Rate (APR)

The cost of credit, expressed as a yearly rate, including interest, mortgage insurance, and loan origination fees. This allows a buyer to compare loans. However, APR should not be confused with the actual note rate.

Asset

Anything owned of monetary value including real or personal property or enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Cap

Limits how much the interest rate or the monthly payment on a mortgage can increase, either at each adjustment time or during the life of the loan.  

Closing

A meeting held to finalize the sale or refinance of a property. The buyer signs the mortgage documents and pays closing costs, also called "settlement."

Closing Costs

These are expenses, over and above the price of the property, that are incurred by buyers and sellers when transferring ownership of a home. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, and appraisal fees. Closing costs will vary according to the loan program, the lenders used, and the property’s location.

Equity

The amount of financial interest in a property. Equity is the difference between the appraised value of the property and the amount owed on the mortgage.

Escrow Disbursements

The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow Payment

The portion of a borrower’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, or other items as they become due.

FICO® Score

FICO scores are the most widely used credit scores in the U.S. for mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many different factors. Higher FICO scores represent lower credit risks, which typically equate to better loan terms.

Housing Expense Ratio

The percentage of a person’s gross monthly income used to pay housing expenses.

Index

A measure of prevailing market rates used with the margin to determine a new interest rate at the time of adjustment of an adjustable-rate mortgage.  The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills.

Initial Interest Rate

This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). 

Interest

The fee charged for borrowing money which is the percentage rate at which interest accrues on the mortgage. It is the rate used to calculate a loan’s monthly payments.

Interest Rate Ceiling

For an adjustable-rate mortgage (ARM), the maximum interest rate that can be charged as specified in the mortgage note.

Interest Rate Floor

The minimum interest rate that can be charged as specified in the mortgage note for an adjustable-rate mortgage (ARM).

Late Charge

The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

Liquid Asset

A cash asset or an asset that is easily converted into cash.

Loan-to-Value (LTV) Percentage

The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Margin

The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Maturity

The date on which the principal balance of a loan becomes due and payable in full.

Mortgage

A legal document that pledges a property to the lender as security for payment of a mortgage loan.

Mortgage Insurance

A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

Net Worth

The value of all  a person's assets, including cash less their obligations/debts.

Non-Liquid Asset

An asset that cannot easily be converted into cash.

Origination Fee

A fee paid to a lender for processing a loan application. 

Payment Change Date

The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM). Generally, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap

A limit on the amount that payments can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

PITI (Principal, Interest, Taxes, and Insurance)

The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

PITI Reserves

A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.

Points

A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point equals $1,650.  Points usually are collected at closing, and may be paid by the borrower, the home seller, or split between them.

Prepayment Penalty

A fee that may be charged to a borrower who pays off a loan before it is due.

Pre-approval 

The process of determining your potential eligibility for a mortgage based on your credit profile before you apply for a loan.

Principal

The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Private Mortgage Insurance (PMI)

Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Qualifying Ratios

Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income and total debt obligations as a percent of income.

Rate Lock

A commitment issued by a lender to a borrower guaranteeing a specified interest rate and lender costs for a specified period of time.

Real Estate Settlement Procedures Act (RESPA)

A consumer protection law that requires lenders to disclose all settlement costs, practices, and relationships.

Recording

The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

Refinance 

Paying off one loan with the proceeds from a new loan using the same property as security.

Secondary Mortgage Market

Where existing mortgages are bought by investors and sold by lenders under guidelines and/or requirements.

Servicer

An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Total Expense Ratio

Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Treasury Index

An index used to determine interest rates for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

Truth-in-Lending

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage including the annual percentage rate (APR) and other charges.

Underwriting

The process of evaluating a loan application to determine approval or denial of the loan request. Underwriting involves an analysis of the applicant’s creditworthiness and the ability to repay the loan and evaluation of the property.