Mortgage Glossary — Terms Defined
Plain-English definitions for 39 mortgage and lending terms, each linked to the relevant calculator.
Mortgage and lending terms
- Adjustable-Rate Mortgage (ARM)
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A mortgage with an interest rate fixed for an initial period (commonly 5, 7, or 10 years), then adjusting annually based on a market index. ARMs typically start lower than fixed rates but carry payment uncertainty after the fixed period.
- Amortization
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The process of paying off a loan through scheduled payments over time. Early payments are mostly interest; equity builds slowly at first and accelerates toward the end of the term.
- Annual Percentage Rate (APR)
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The true yearly cost of a loan expressed as a percentage. APR includes the interest rate plus lender fees and points, making it a more complete comparison tool than the interest rate alone.
- Appraisal
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A licensed professional's estimate of a property's market value, required by lenders before approving a mortgage. If the appraisal comes in below the purchase price, the buyer may need to renegotiate or cover the gap in cash.
- Assessed Value
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The value assigned to a property by a local tax authority for property tax calculation purposes. Often lower than market value and varies significantly by county and state.
- Back-End DTI
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The ratio of all monthly debt payments — housing costs plus car loans, student loans, credit card minimums, and other obligations — to gross monthly income. Most conventional loans cap back-end DTI at 45%–50%.
- Bridge Loan
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A short-term loan used to finance the gap between buying a new home and selling an existing one. Bridge loans carry higher rates and fees and are typically repaid within 6–12 months when the old home sells.
- Cap Rate
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Capitalization rate — a measure of rental property income potential: Net Operating Income ÷ Purchase Price. Higher cap rates mean more income relative to cost but often signal higher risk.
- Cash-Out Refinance
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A refinance where you borrow more than your current mortgage balance and receive the difference as cash, drawing on your home equity. The new loan is larger than the old one.
- Closing Costs
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Fees paid at the closing of a real estate transaction. Buyers typically pay 2%–5% of the purchase price, covering origination fees, title insurance, appraisal, prepaid taxes, and escrow setup.
- Conventional Loan
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A mortgage not backed by a government agency (unlike FHA, VA, or USDA loans). Conventional loans generally require stronger credit and larger down payments but offer more flexibility in property types and loan structures.
- Debt-to-Income Ratio (DTI)
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The percentage of gross monthly income that goes toward debt payments. Lenders use DTI to assess your ability to manage monthly payments and qualify for a loan. Most programs require DTI below 43%–50%.
- Discount Points
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Upfront fees paid to a lender at closing to buy down the interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.20%–0.25%. Worth it only if you stay in the home past the break-even date.
- Down Payment
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The portion of the purchase price paid in cash at closing, not financed by the mortgage. A larger down payment reduces the loan amount, lowers monthly payments, and may eliminate the need for PMI.
- Earnest Money
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A deposit made with a purchase offer, typically 1%–3% of the price, to signal serious intent. Applied toward the down payment or closing costs at closing; may be forfeited if the buyer backs out without a valid contingency.
- Equity
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The portion of your home's value you own outright — current market value minus remaining mortgage balance. Equity grows as you pay down the loan and as the home appreciates.
- Escrow
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An account held by a neutral third party to manage funds during a transaction, or on an ongoing basis to collect and pay property taxes and homeowners insurance as part of your monthly mortgage payment.
- FHA Loan
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A government-backed mortgage insured by the Federal Housing Administration. Allows down payments as low as 3.5% with a 580+ credit score. Requires an upfront MIP (1.75%) and annual MIP that typically lasts the life of the loan if the down payment is under 10%.
- Fixed-Rate Mortgage
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A mortgage with an interest rate and monthly payment that never change for the entire loan term. Provides complete payment predictability regardless of market conditions.
- Front-End DTI
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The ratio of housing costs alone — principal, interest, property taxes, and insurance — to gross monthly income. Most lenders target a front-end DTI of 28%–31% or lower.
- HELOC (Home Equity Line of Credit)
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A revolving credit line secured by your home equity, typically up to 80%–85% of the home's value minus your mortgage. Works like a credit card: draw and repay during the draw period (usually 10 years), then repay principal and interest.
- HOA (Homeowners Association)
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An organization in a planned community or condo building that enforces rules and maintains common areas. Monthly HOA fees are included in your PITI calculation and count toward your front-end DTI.
- Home Equity Loan
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A fixed-rate, lump-sum loan secured by your home equity. Unlike a HELOC, the full amount is disbursed at once with fixed monthly payments. Often called a second mortgage.
- Jumbo Loan
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A mortgage exceeding conforming loan limits set by Fannie Mae and Freddie Mac ($806,500 in most U.S. markets for 2025). Jumbo loans typically require higher credit scores, larger down payments, and may carry slightly higher rates.
- Lender Credits
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A credit from the lender that reduces your closing costs in exchange for a higher interest rate. The opposite of discount points — beneficial if you plan to sell or refinance before reaching the break-even point.
- Loan-to-Value Ratio (LTV)
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The ratio of the loan amount to the property's appraised value (Loan ÷ Value × 100). An LTV above 80% on a conventional loan triggers PMI. Lenders use LTV to assess lending risk.
- Mortgage Insurance Premium (MIP)
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Required insurance on FHA loans. Includes an upfront premium (1.75% of loan amount) at closing plus an ongoing annual premium (0.55%–1.05%) built into monthly payments. Unlike PMI, MIP typically lasts the life of an FHA loan if the down payment is under 10%.
- Net Operating Income (NOI)
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Gross rental income minus operating expenses (vacancy, property management, insurance, taxes, maintenance) — not including mortgage payments. Used to calculate cap rate and evaluate investment property performance.
- Origination Fee
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A lender fee for processing a new mortgage, typically 0.5%–1% of the loan amount. Covers underwriting, processing, and administrative costs. Paid at closing and included in APR calculations.
- PITI
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Principal, Interest, Taxes, and Insurance — the four components of a standard monthly mortgage payment. Lenders use total PITI to calculate your front-end DTI and determine qualifying payment amounts.
- PMI (Private Mortgage Insurance)
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Insurance required on conventional loans when the down payment is under 20%. Protects the lender — not you — against default. Typically costs 0.2%–2% of the loan annually and can be canceled once you reach 80% LTV.
- Pre-Approval
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A lender's conditional commitment to lend a specific amount based on verified credit, income, and assets. Stronger than pre-qualification because it involves documented verification — sellers strongly prefer buyers with pre-approval letters.
- Pre-Qualification
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An informal estimate of how much you might borrow based on self-reported financial information, without a hard credit check. Less reliable than pre-approval and generally not accepted as a condition in competitive purchase offers.
- Principal
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The original loan amount borrowed, or the remaining balance owed. Each mortgage payment reduces principal by a portion — a small amount early in the loan (due to amortization) that grows over time.
- Rate Lock
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A lender's guarantee that a specific interest rate will be held for a defined period — typically 15–60 days — while the loan is processed. If market rates rise during this window, your locked rate is protected.
- Refinance
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Replacing an existing mortgage with a new loan — typically to lower the interest rate, reduce monthly payments, change the loan term, or access equity through a cash-out refinance.
- Title Insurance
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Insurance protecting against ownership disputes, liens, or defects in a property's title history. Lender's title insurance is required at closing; owner's title insurance is optional but strongly recommended.
- Underwriting
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The lender's process of evaluating a mortgage application — verifying income, assets, credit, employment, and property value to decide whether to approve the loan and at what terms. The underwriter makes the final credit decision.
- VA Loan
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A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. Requires no down payment and no PMI, typically with competitive rates and limited closing costs.