Reference
Mortgage terms, in plain English.
Every term defined the way I'd explain it on a call. No jargon defending more jargon. If a word is tripping you up, just ask me.
- Adjustable-rate mortgage (ARM)
- A loan whose interest rate starts fixed for a set period (like 5, 7, or 10 years), then adjusts on a schedule. ARMs start lower than fixed rates and make sense when you don't plan to keep the loan long.
- Amortization
- The schedule by which a loan is paid off over time. Early payments go mostly to interest; later ones go mostly to principal.
- Annual percentage rate (APR)
- A figure that reflects the yearly cost of a loan including certain fees, not just the interest rate. It lets you compare loans on closer-to-equal terms.
- Appraisal
- An independent estimate of a home's value, ordered during the loan to confirm the home is worth what you're paying for it.
- Closing
- The final step where you sign the loan documents, pay any remaining costs, and the home becomes yours.
- Closing costs
- The fees due at closing beyond the down payment: lender fees, title work, taxes, insurance, and more. Some are negotiable; some aren't.
- Closing Disclosure
- A document you receive before closing that lays out the final loan terms, monthly payment, and exact cash needed. You review it before you sign.
- Conforming loan
- A loan at or below the limit set each year for purchase by Fannie Mae and Freddie Mac. Loans above the limit are 'jumbo.'
- Conventional loan
- A mortgage not backed by a government program. It usually offers the best terms when your credit and finances are strong.
- Debt-to-income ratio (DTI)
- The share of your monthly income that goes to debt payments. Lenders use it to judge how much mortgage you can handle.
- Down payment
- The cash you put toward the purchase up front. The rest is financed. Some programs allow a much smaller down payment than the traditional 20 percent.
- Down payment assistance
- Grants or second loans that reduce the cash a buyer needs up front. Often used by first-time and first-generation buyers.
- DSCR loan
- Debt service coverage ratio loan. An investor loan that qualifies on whether a rental property's income covers its payment, rather than on your personal income.
- Earnest money
- A deposit you put down with an offer to show you're serious. It's credited toward your costs at closing if the deal goes through.
- Equity
- The portion of your home you actually own: its value minus what you still owe. It grows as you pay down the loan and as the home appreciates.
- Escrow
- An account your lender uses to hold and pay your property taxes and insurance, so those costs are bundled into your monthly payment instead of due in lump sums.
- FHA loan
- A mortgage insured by the Federal Housing Administration. Known for flexible credit requirements and low down payments, popular with first-time buyers.
- Fixed-rate mortgage
- A loan whose interest rate stays the same for the entire term, so your principal-and-interest payment never changes.
- Foreclosure
- The legal process by which a lender takes back a home after a borrower fails to make payments. The whole point of buying within your means is to never get near it.
- Interest rate
- The percentage charged on the money you borrow, separate from the APR. Your rate depends on the market, your credit, the loan, and more.
- Jumbo loan
- A mortgage above the conforming loan limit. Common in higher-priced areas of Northern Virginia. Underwriting looks more closely at credit and reserves.
- Loan estimate
- A standardized document you get after applying that lays out your estimated rate, payment, and closing costs so you can compare lenders.
- Loan-to-value ratio (LTV)
- The loan amount as a percentage of the home's value. A lower LTV (bigger down payment) usually means better terms and no mortgage insurance.
- Mortgage insurance (PMI / MIP)
- Insurance that protects the lender when your down payment is small. Conventional loans call it PMI; FHA calls it MIP. Conventional PMI can come off once you have enough equity.
- Non-QM loan
- A non-qualified mortgage for creditworthy borrowers who don't fit standard guidelines, like the self-employed or investors. It's about how you document income, not a lower bar.
- Origination
- The process of creating a new loan, from application through closing. A loan officer originates the loan.
- Points
- Optional upfront fees you can pay to lower your interest rate. One point is one percent of the loan amount. Whether they're worth it depends on how long you keep the loan.
- Pre-approval
- A lender's documented confirmation of how much you can borrow, based on reviewed income, credit, and assets. Stronger than a pre-qualification when you make an offer.
- Pre-qualification
- An early, lighter estimate of what you might borrow, based on information you provide. A starting point, not the same as a pre-approval.
- Principal
- The amount you actually borrowed, separate from interest. Your balance is the principal still owed.
- Private mortgage insurance (PMI)
- Mortgage insurance on a conventional loan with a smaller down payment. It can be removed once you've built enough equity, unlike most FHA insurance.
- Rate lock
- A lender's commitment to hold a specific interest rate for a set window while your loan is processed, protecting you if rates rise.
- Refinance
- Replacing your current mortgage with a new one, usually to lower the rate, change the term, or move from an adjustable to a fixed rate.
- Reverse mortgage
- A loan for older homeowners that converts home equity into cash while they keep living in the home. Repaid later, typically when the home is sold.
- Title
- Legal ownership of the property. Title work during the loan confirms there are no ownership disputes or unpaid claims against the home.
- Underwriting
- The lender's review of your full loan file: income, credit, assets, and the property, to decide whether to approve the loan and on what terms.
- USDA loan
- A government-backed loan for homes in eligible areas, including many suburbs, that allows a zero-down purchase for buyers within income limits.
- VA loan
- A loan guaranteed by the Department of Veterans Affairs for eligible veterans, service members, and spouses. No down payment and no monthly mortgage insurance for those who qualify.
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