REFERENCE GUIDE•December 10, 2025•Bookmark This Page

The Ultimate Mortgage Glossary 2025: 127 Terms Explained Simply

Confused by mortgage jargon? We've translated 127 mortgage terms into plain English so you can understand exactly what lenders are talking about.

EC

Emily Chen

Mortgage Education Specialist • 8+ Years Experience

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⭐ 10 Most Important Terms to Know

→ APR (Annual Percentage Rate)→ Closing Costs→ DTI (Debt-to-Income Ratio)→ Escrow→ LTV (Loan-to-Value Ratio)→ PMI (Private Mortgage Insurance)→ Points (Discount Points)→ Pre-Approval→ Underwriting
MUST KNOW

APR (Annual Percentage Rate)

The TRUE cost of your loan per year, including interest rate PLUS fees. Always higher than the interest rate alone.

Example: Compare APRs, not just interest rates, when shopping for mortgages.

Adjustable-Rate Mortgage (ARM)

A mortgage where the interest rate changes periodically. Starts with a lower rate for 3-10 years, then adjusts.

Example: A 5/1 ARM has a fixed rate for 5 years, then adjusts every 1 year.

Amortization

The process of paying off your loan over time. Early payments are mostly interest; later payments are mostly principal.

Example: On a 30-year mortgage, you won't pay more principal than interest until about year 18!

Appraisal

A professional assessment of a home's market value. Required by lenders to ensure the home is worth the loan amount.

Example: Cost: $300-$600, paid by the buyer.

Assumable Mortgage

A mortgage that can be transferred from seller to buyer, keeping the original rate. FHA, VA, and USDA loans are assumable.

Example: Assuming a 3% mortgage from 2021 can save you hundreds per month!

Balloon Mortgage

Low monthly payments for 5-7 years, then the entire remaining balance is due in one lump sum.

Example: Risky for most buyers. Only consider if you'll sell or refinance before the balloon payment.

Bridge Loan

A short-term loan to buy a new home before selling your current one. Uses your current home's equity.

Example: Typical terms: 6-12 months, 8-10% interest rates.

Buydown

Paying extra upfront to temporarily reduce your interest rate for the first few years.

Example: A 2-1 buydown on a 6% loan means you pay 4% year 1, 5% year 2, then 6% after.

Cash-Out Refinance

Refinancing for more than you owe and taking the difference in cash. Uses your home equity.

Example: Common uses: Home improvements, debt consolidation. Limited to 80% LTV.
MUST KNOW

Closing Costs

All fees paid when finalizing your mortgage: lender fees, title insurance, appraisal, attorney fees, prepaid taxes/insurance.

Example: Expect 2-5% of loan amount. On $400K loan = $8,000-$20,000.

Conforming Loan

A mortgage meeting Fannie Mae/Freddie Mac guidelines, including loan limits ($806,500 in 2025).

Example: Conforming loans typically have lower rates than jumbo loans.

Contingency

A condition in your purchase contract that must be met for the sale to proceed.

Example: Common contingencies: financing, inspection, appraisal.

Conventional Loan

A mortgage NOT backed by a government agency (FHA, VA, USDA). Requires higher credit scores.

Example: Usually 620+ credit, 3-20% down, PMI if less than 20% down.

Deed

The legal document that transfers property ownership from seller to buyer.

Example: Recorded with the county after closing.

Down Payment

The upfront cash you pay toward the home purchase. The rest is covered by your mortgage.

Example: Minimums: Conventional 3-5%, FHA 3.5%, VA 0%, USDA 0%.
MUST KNOW

DTI (Debt-to-Income Ratio)

Your total monthly debt payments divided by gross monthly income. Determines how much you can borrow.

Example: Most lenders want DTI below 43%. Formula: (All debts ÷ Gross income) × 100

Earnest Money

A deposit when your offer is accepted, showing you're serious. Held in escrow until closing.

Example: Typical: 1-3% of purchase price. Applied to your down payment.

Equity

The portion of your home you own—the difference between value and what you owe.

Example: Home worth $400K, mortgage $300K = $100K equity (25%).
MUST KNOW

Escrow

An account where your lender holds money for property taxes and insurance, paid monthly with your mortgage.

Example: Ensures your taxes and insurance are always paid on time.

FHA Loan

Government-backed mortgage insured by Federal Housing Administration. Popular with first-time buyers.

Example: 580+ credit for 3.5% down. Requires MIP (mortgage insurance).

Fixed-Rate Mortgage

A mortgage where the interest rate stays the same for the entire loan term.

Example: Predictable payments that never change (except tax/insurance adjustments).

Forbearance

A temporary pause or reduction in payments during financial hardship.

Example: Missed payments typically added to the end of the loan.

Gift Funds

Money given by family to help with your down payment. Requires a gift letter.

Example: FHA allows 100% gift. Conventional may require some of your own funds.

HELOC

Home Equity Line of Credit. A revolving credit line secured by your home equity.

Example: Works like a credit card—borrow as needed, pay interest only on what you use.

HOA

Homeowners Association. Manages community and collects fees for shared amenities.

Example: Fees range $100-$1,000+/month. Factor into your budget!

Jumbo Loan

A mortgage exceeding conforming loan limits ($806,500 in most areas for 2025).

Example: Usually 700+ credit, 10-20% down, lower DTI ratios required.

Lien

A legal claim against your property. Your mortgage is a lien.

Example: If you don't pay, the lender can foreclose.

Loan Estimate (LE)

A standardized form showing estimated rate, payment, and closing costs. Provided within 3 days of application.

Example: Compare Loan Estimates from multiple lenders to find the best deal.
MUST KNOW

LTV (Loan-to-Value Ratio)

Your loan amount divided by home value. Determines PMI requirements and affects your rate.

Example: $320K loan on $400K home = 80% LTV (no PMI required!)

Rate Lock

A guarantee your interest rate won't change for a set period (30-60 days) while you close.

Example: Lock when comfortable with the rate. Longer locks may cost more.

MIP (Mortgage Insurance Premium)

FHA's version of PMI. Includes upfront (1.75%) plus annual premiums (0.55%).

Example: FHA MIP lasts for life of loan. Conventional PMI can be removed at 20% equity.

Mortgage Broker

A middleman who shops multiple lenders on your behalf to find the best rate.

Example: Pros: Access to many lenders. Cons: Additional fees.

Negative Amortization

When your payment doesn't cover all interest due, and unpaid interest adds to your balance.

Example: Avoid! Your debt grows instead of shrinking.

Origination Fee

A fee charged by the lender for processing your loan. Typically 0.5%-1% of loan amount.

Example: Often negotiable, especially with strong credit.

PITI

Principal, Interest, Taxes, and Insurance—the four components of your total monthly payment.

Example: Always calculate PITI, not just P&I. Taxes/insurance can add $500+/month!
MUST KNOW

PMI (Private Mortgage Insurance)

Insurance required when down payment is less than 20%. Protects the LENDER if you default.

Example: Adds $100-$400/month. Can be removed at 20% equity.
MUST KNOW

Points (Discount Points)

Upfront fees to lower your rate. One point = 1% of loan, typically reduces rate by 0.25%.

Example: On $400K loan, 1 point costs $4,000, saves ~$60/month. Break-even: 5.5 years.
MUST KNOW

Pre-Approval

A lender's conditional commitment to lend based on verified income, credit, and assets.

Example: Much stronger than pre-qualification. Essential in competitive markets.

Prepayment Penalty

A fee charged if you pay off your mortgage early. Rare on standard mortgages today.

Example: Check your loan documents to be sure.

Principal

The amount you borrowed (or still owe), not including interest.

Example: Each payment reduces your principal balance.

Refinance

Replacing your current mortgage with a new one for a lower rate, different term, or cash out.

Example: Makes sense if you can lower rate by 0.75%+ and stay 3+ years.

Second Mortgage

An additional loan against your home while you still have your first mortgage.

Example: HELOCs and home equity loans are types of second mortgages.

Seller Concessions

When the seller agrees to pay some of your closing costs.

Example: FHA allows up to 6%, conventional 3-9% depending on down payment.

Streamline Refinance

Simplified refinance for FHA/VA/USDA with reduced documentation and no appraisal.

Example: Faster and cheaper than standard refinancing.

Title

Legal ownership of a property. A title search ensures no claims or liens before you buy.

Example: Title insurance protects against defects discovered after closing.
MUST KNOW

Underwriting

The process where a lender verifies your income, assets, credit, and property to approve your loan.

Example: Takes 1-3 weeks. Don't make major financial changes during this time!

USDA Loan

Government-backed mortgage for rural/suburban buyers with no down payment. Income limits apply.

Example: Many suburban areas qualify as "rural" for USDA purposes.

VA Loan

Mortgage guaranteed by VA for veterans and active-duty. No down payment or PMI required.

Example: 0% down, no PMI, competitive rates. One of the best programs available.

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EC

Emily Chen

Mortgage Education Specialist • 8+ Years Experience

Emily specializes in making complex mortgage concepts accessible to first-time homebuyers.