Mortgage Terminology & Definitions

A

Amortization

The mathematical schedule of paying off a debt over time. Early payments are primarily interest; later payments are primarily principal.

APR (Annual Percentage Rate)

A broader measure of the cost of borrowing than the interest rate alone. The APR includes the interest rate plus other costs such as broker fees, discount points, and some closing costs, expressed as a yearly percentage.

Appraisal

A professional estimate of a property's market value. Lenders require this to ensure the loan amount does not exceed the value of the home.

B

Break-Even Point

In refinancing, this is the moment when the savings from a lower monthly payment equal the upfront costs of the new loan. After this point, the refinance becomes financially beneficial.

C

Cash-Out Refinance

A mortgage refinancing option where the new loan amount is higher than the existing loan balance. The borrower receives the difference in cash.

Closing Costs

Fees paid at the end of a real estate transaction. These typically include loan origination fees, title insurance, appraisal fees, and prepaid taxes.

Conventional Loan

A mortgage that is not insured or guaranteed by the federal government (unlike FHA, VA, or USDA loans). These loans usually adhere to guidelines set by Fannie Mae and Freddie Mac.

Credit Score

A numerical expression based on a level analysis of a person's credit files, representing the creditworthiness of an individual. Higher scores generally qualify for lower interest rates.

D

Debts (Monthly)

Recurring monthly obligations used to calculate your DTI ratio. This typically includes minimum credit card payments, student loans, car loans, and alimony/child support. It usually excludes living expenses like groceries or utilities.

DTI (Debt-to-Income Ratio)

A personal finance measure that compares an individual's monthly debt payment to their monthly gross income. Lenders use this ratio to determine your ability to repay the loan.

Down Payment

The initial upfront portion of the total amount due, usually given in cash at the time of finalizing the transaction.

E

Equity

The difference between the market value of your home and the amount you owe on your mortgage. Equity increases as you pay down your principal and/or as the property value rises.

Escrow

An account held by a neutral third party (often the lender) to pay obligations such as property taxes and homeowners insurance on your behalf.

Extra Payment

An additional amount paid on top of the scheduled monthly mortgage payment. This extra amount goes directly toward reducing the loan principal, shortening the loan term and saving on interest.

G

Gross Annual Income

Your total income earned before taxes and other deductions are taken out. This is the figure lenders use for qualification purposes.

H

Home Insurance

Also known as hazard insurance, this covers losses and damages to an individual's house and assets in the home. Lenders require this coverage to protect the collateral.

HOA (Homeowners Association) Fees

Monthly fees paid by owners of certain types of residential properties (like condos or planned communities) to an association that maintains common areas and enforces rules.

Home Price

The agreed-upon sale price of the property. This is the starting point for all mortgage calculations.

I

Interest Rate

The percentage of the principal charged by the lender for the use of its money. The interest rate is usually expressed as an annual percentage.

L

Loan Term

The period over which a loan agreement is in force, and before or at the end of which the loan should either be repaid or renegotiated. Common terms are 15 and 30 years.

LTV (Loan-to-Value)

A risk assessment ratio used by lenders. It is calculated by dividing the mortgage amount by the appraised property value. Higher LTVs are considered higher risk.

P

PITI

An acronym for Principal, Interest, Taxes, and Insurance—the four main components of a monthly mortgage payment.

PMI (Private Mortgage Insurance)

Insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is typically required when the down payment is less than 20%.

Principal

The amount of money borrowed to buy your house, or the amount of the loan that you have not yet repaid. This does not include interest.

Property Tax

A tax assessed on real estate by the local government. The tax is usually based on the value of the property (including the land).

R

Refinancing

The process of replacing an existing mortgage with a new one, typically to get a lower interest rate, shorten the loan term, or access cash from home equity.