Mortgage Glossary
Learn the essential mortgage terms and definitions. Understanding these terms helps you make better decisions when buying a home or refinancing.
Buying a home involves a lot of unfamiliar terminology. This glossary covers the most common mortgage terms you'll encounter during the homebuying process, from the rate vocabulary on your Loan Estimate to the servicing terms that show up years after closing. Whether you're a first-time buyer or refinancing, bookmark this page for quick reference.
For interactive tools that put these terms into practice, try our mortgage calculator, affordability calculator, or closing cost calculator.
Rate and Pricing Terms
Amortization
The process of spreading loan payments over time. Early payments go mostly to interest, while later payments go mostly to principal. On a $400,000 loan at 6.5%, month one sends $2,166.67 to interest and only $361.61 to principal, and the split does not flip until payment 233. See our amortization guide for the full schedule.
APR
Annual Percentage Rate. The true yearly cost of borrowing, including the interest rate plus most lender fees and points, rolled into one number. APR is always higher than the note rate: a $400,000 loan at 6.5% with $8,000 of finance charges shows an APR near 6.78%. Compare APR when fee structures differ, and compare the note rate when you care about the payment.
ARM
Adjustable Rate Mortgage. A loan with an interest rate that can change over time based on market conditions. ARMs typically start with a lower fixed rate for 5, 7, or 10 years before adjusting. Adjustments are capped, commonly 2% per adjustment and 5% above the starting rate over the loan's life. Compare the structures with the fixed vs ARM calculator.
Discount Point
An upfront fee equal to 1% of the loan amount, paid at closing to buy down the note rate, usually by about 0.25%. One point on a $400,000 loan costs $4,000 and lowers the payment by roughly $65 a month at 6.5%, a break-even near 61 months. If you sell before that, the point lost money. Test your quote with the points calculator.
Fixed-Rate Mortgage
A loan with an interest rate that stays the same for the entire loan term, so a 30-year fixed produces 360 identical principal-and-interest payments. On $400,000 at 6.5% that payment is $2,528.27 for every one of the 360 months, adding up to $510,178 of interest. Predictable payments and protection from rate increases are the trade for a starting rate that is usually above the ARM.
Index and Margin
The two inputs behind every adjustable rate. The index is a published market benchmark such as SOFR, which moves; the margin is the fixed spread your lender adds, typically 2.25% to 3.00%. A loan priced at SOFR plus 2.50%, with SOFR at 4.30%, resets near 6.80% before caps, so read the caps in your note along with the margin. See how ARM payments are calculated.
Interest Rate
The percentage of the loan amount that the lender charges for borrowing money. Your interest rate is determined by your credit score, down payment, loan type, and market conditions. The monthly rate is the annual rate divided by 12, so 6.5% becomes 0.541667% a month, which is $2,166.67 of interest on a $400,000 balance in the very first month.
Note Rate
The interest rate written into your loan note and applied to the balance each month, also called the contract rate. The note rate sets your principal-and-interest payment, while the APR adds fees for comparison shopping. Two lenders can quote the same 6.5% note rate and different APRs if one charges $4,000 in origination fees and the other charges none. Current pricing context lives on our mortgage rates page.
Yield Spread
The gap between the rate on your loan and the rate at which that loan sells in the secondary market, quoted in basis points, where 100 basis points equals 1%. A yield spread premium is the extra compensation a broker earns for placing you in a loan with a wider spread, which is why a higher rate can mean a larger payout. Originators disclose the spread on your loan paperwork.
Loan Cost and Closing Disclosure Terms
Cash to Close
The total amount you bring to the closing table: down payment plus closing costs plus prepaid escrow items, minus seller credits and any earnest money already deposited. On a $400,000 purchase with 5% down, $10,000 of closing costs, and $3,000 of prepaids, cash to close lands near $33,000. The figure sits on page two of your Closing Disclosure.
Closing Costs
Fees paid at the end of a real estate transaction, typically 2-5% of the loan amount. Includes appraisal, title insurance, origination fees, and prepaid items like taxes and insurance. On a $400,000 loan that is $8,000 to $20,000, with a 1% origination fee alone accounting for $4,000 of it. See the full breakdown in our closing cost calculator.
Closing Disclosure
The five-page final statement you receive at least three business days before closing, listing your loan terms, monthly payment, and every dollar of cash to close. It is the successor to the old HUD-1 settlement statement, retired when the integrated TILA-RESPA disclosure rules took effect in October 2015. Compare it line by line against your Loan Estimate and question any increase in the loan costs section before you sign.
Coercion
Pressure on a borrower, builder, or agent to use a particular lender, title company, or settlement service. Your Closing Disclosure carries a statement that the provider did not require the use of any specific settlement service provider or impose a charge as a condition of settlement, because required-use and kickback arrangements were common before they were restricted. You may shop your own title, insurance, and lender without penalty.
Loan Estimate
The standardized three-page form your lender must deliver within three business days of a mortgage application, showing rate, APR, monthly payment, and itemized costs in fixed categories so that offers from different lenders line up. It replaced the Good Faith Estimate when the integrated disclosure rules arrived in 2015. Its Comparisons section projects what you will have paid in principal, interest, and fees after five years.
Proration
The split of property taxes, HOA dues, and similar charges between buyer and seller at closing. If the seller's annual tax bill is $4,800 and you close on September 30, the seller is credited nine months ($3,600) and you are charged three ($1,200). Prorations appear as credits and charges on your Closing Disclosure, and they move cash to close in either direction depending on your closing date.
TILA
The Truth in Lending Act, the federal law that requires lenders to disclose the cost of credit in a standard format, including the finance charge and the APR. It is the reason your Loan Estimate and Closing Disclosure look the same at every lender. TILA also gives borrowers on certain refinance and home equity transactions a three-business-day right of rescission after closing.
Title Insurance
Insurance that protects against defects in the title to real property. Required by most lenders and protects your ownership rights. A lender's policy typically runs $500 to $1,500 on a $400,000 purchase, and an owner's policy, which protects you rather than the lender, is separate. Rates are set by state and do not change from one insurer to the next, so comparing carriers on price rarely pays.
VA Funding Fee
The one-time fee on a VA loan that replaces mortgage insurance, ranging from 1.2% to 3.3% of the loan amount based on down payment and whether it is a first or later use. First use with nothing down is commonly 2.15%, which is $8,600 on a $400,000 loan, and the fee may be financed into the balance. Veterans receiving compensation for service-connected disabilities pay no funding fee.
Credit and Qualification Terms
Ability to Repay (ATR)
The requirement that a lender make a reasonable, good-faith determination that you can repay the loan before issuing it, weighing credit history, employment, income, assets, the monthly payment, and your other obligations. It is why underwriters ask for pay stubs, tax returns, and bank statements. A loan originated without this analysis exposes the lender to borrower claims, which is why full documentation became the norm after 2010.
Combined LTV (CLTV)
Loan-to-value calculated across every lien on the property, not just the first mortgage. If your first mortgage is $280,000 on a $400,000 home and you borrow another $60,000 through a HELOC, your CLTV is 85% even though the first loan alone sits at 70%. Lenders cap CLTV, usually at 80% to 85%, which is what limits how much equity you can pull. Model it with the HELOC calculator.
Debt-to-Income Ratio (DTI)
Your monthly debt payments divided by your gross monthly income. Lenders use this to determine how much you can borrow. Most lenders prefer DTI under 43%. A $6,000 gross income with $1,800 of car and card payments is a 30% ratio; add a $1,400 housing payment and it jumps to 53%, past the limit on most programs. Calculate yours with the DTI calculator.
Home Appraisal
An estimate of a home's market value conducted by a licensed professional. Required by lenders before approving a mortgage to ensure the property is worth the loan amount. A desktop or hybrid appraisal often runs $300 to $600 and a full interior appraisal more, and the number drives your loan-to-value. If it comes in low, you can contest it with comparable sales, bring more cash, or renegotiate the price.
Loan-to-Value Ratio (LTV)
The loan amount divided by the home's value, expressed as a percentage. Lower LTV means more equity and better loan terms. An 80% LTV means you have 20% equity. On a $400,000 home a $360,000 loan is 90% LTV and carries PMI, while a $320,000 loan sits at 80% and does not. Use the down payment calculator to see where a given down payment lands.
Pre-Approval
A lender's estimate of how much you can borrow, based on your financial information. More formal than pre-qualification and shows sellers you're a serious buyer. It requires a hard credit check and full documentation, and the letter is usually good for 60 to 90 days. The rate on the letter is a snapshot: on $400,000, pricing at 6.25% instead of 6.5% changes your payment by about $65 a month.
Residual Income
The money left over each month after the mortgage payment and other obligations, a measure VA and USDA underwriting uses alongside DTI. VA sets dollar floors by region, loan amount, and household size, typically $700 to $1,000 a month for a two-person household in most regions and higher for larger families. A borrower can pass DTI comfortably and still fail on residual income, so build the margin into your budget.
Seasoning
The time a loan, borrower, or property must be established before the next step is allowed. Lenders commonly want six months of payments before you refinance a purchase, and rental income generally must be documented for two years before it counts toward qualification. Property seasoning also applies after a sale or transfer before the loan can be sold to Fannie Mae or Freddie Mac.
Underwriting
The evaluation a lender performs to decide whether to approve your loan: credit, income, assets, documentation, and an appraisal to confirm the property supports the price. Underwriting starts once you are in contract, and a purchase loan typically closes in 30 to 45 days. Conditional approval means the file is clear except for listed items such as a latest pay stub, a gift letter, or proof of insurance.
Payment and Mortgage Insurance Terms
Escrow
An account where money is held by a third party (usually the lender) to pay for property taxes and insurance. Your monthly payment includes an escrow portion for these expenses. If taxes run $4,200 a year and insurance runs $1,800, the escrow share is $500 a month, and most servicers also hold two months of that amount as a cushion after closing.
Mortgage Insurance (PMI)
Insurance that protects the lender if you default. Required when down payment is less than 20%. Can be removed once you reach 20% equity on conventional loans. Premiums run about 0.5% to 1.0% of the loan a year, so $1,900 to $3,800 on a $380,000 balance, or $158 to $317 a month. Price your scenario with the PMI calculator.
Mortgage Insurance Premium (MIP)
The mortgage insurance charged on FHA loans: a one-time upfront premium of 1.75% of the loan amount, usually financed, which is $7,000 on a $400,000 loan, plus an annual premium billed monthly that commonly falls between 0.40% and 0.85% of the balance. With less than 10% down you pay MIP for the life of the loan; with 10% or more it ends after 11 years.
P&I
Principal and Interest. The main components of a mortgage payment. Principal reduces your loan balance; interest is the cost of borrowing. On a $400,000 loan at 6.5% the P&I payment is $2,528.27 and stays the same for all 360 payments, even though the split shifts from $2,166.67 of interest in month one to $13.62 in month 360.
PITI
Principal, interest, taxes, and insurance, the four parts of a complete mortgage payment. That $400,000 loan at 6.5% costs $2,528.27 of P&I, plus roughly $300 of property tax and $125 of insurance, for about $2,953 before PMI or HOA dues. Lenders qualify you on PITI rather than P&I alone, which is why a $400 monthly tax bill can matter as much as a quarter-point of rate. See the breakdown in how mortgage payments work.
Prepayment Penalty
A fee for paying the loan off early, almost always confined to the first three to five years. It is rare on conventional mortgages written today but does show up on some hard-money, subprime, and small-commercial loans, commonly 1% to 5% of the balance. Retiring a $400,000 loan with a 3% penalty costs $12,000, so read the prepayment section of the note before you sign it.
Principal
The original loan amount, or the remaining balance of the loan. Each payment reduces the principal, building your equity over time. The reduction is slow at first: after five years on a $400,000 loan at 6.5% you will have paid $151,696 but cut the balance by only $25,556, which is the amortization curve doing what it does.
Subordination
The ordering of liens on your property. A first mortgage is senior and gets paid first if the loan defaults; any second lien is subordinate. Refinancing a first mortgage while a HELOC stays open requires the new first lien to be resubordinated, and the HELOC lender can refuse, which stalls the refinance. Subordination approvals take time, so request them as soon as you are under contract.
Ownership, Servicing, and Loan Status Terms
Equity
The portion of your home you actually own. Calculated as home value minus mortgage balance. Build equity through mortgage payments, home improvements, or appreciation. A $400,000 home with a $320,000 balance is 20% equity; if the home appraises at $420,000 a year later, the same balance is about 24% equity without one extra payment from you.
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans typically have stricter credit requirements and may carry higher rates. Expect a credit score of 700 or better, a debt-to-income ratio under 43%, and several months of reserves. The baseline limit was $806,500 for 2025 and is reset every January, with higher limits in high-cost markets.
REO
Real estate owned, meaning a foreclosed property that the lender took back and now holds after the auction failed to sell. REO sales run through a listing agent with the lender as seller, often on an as-is basis with limited disclosures, and offers are submitted on the lender's contract forms rather than your local board's standard paperwork. Deals move slower than a normal purchase but the price is negotiable.
Refinancing
Replacing your current mortgage with a new one, typically to get a lower rate, different term, or cash out equity. Use our refinance calculator to see if it makes sense. Closing costs run 2% to 5% of the new loan, so divide them by your monthly savings to find break-even: $8,000 in costs against $250 a month is 32 months before you are ahead.
Transfer of Servicer
The movement of your loan's servicing rights from one company to another. Your rate, balance, and terms do not change, only the payment address and customer service number. The transfer is regulated: you must receive written notice at least 15 days before it takes effect, and your first payment to the new servicer follows a separate notice. Interest accrues normally through the switch, so payments are never lost.
Warranty of Value
The implication that an appraised value supports the loan amount, most visible on government-backed financing where the appraisal must satisfy program property standards as well as market value. If the appraisal lands below the contract price, the lender will not fund the full amount, so the seller must reduce the price, the borrower must cover the gap in cash, or the deal ends. It is the most common appraisal problem in practice.
Frequently Asked Questions
What is the most important mortgage term to understand? APR (Annual Percentage Rate) is arguably the most important because it includes both the interest rate and fees, giving you the true cost of the loan. A 6.5% note rate with $8,000 of finance charges can display an APR near 6.78%, so always compare APR when you collect offers from three lenders inside a 14-day window.
What does LTV mean? LTV (Loan-to-Value) is the loan amount divided by the home's value. An 80% LTV means you're borrowing 80% and have 20% equity, which is the threshold that ends PMI on a conventional loan. On a $400,000 home, 80% LTV is a $320,000 loan. Lower LTV earns better pricing and avoids mortgage insurance entirely.
When can I remove PMI? You can request PMI removal when your loan balance reaches 80% of the original home value, which is $320,000 on a $400,000 purchase. Lenders must automatically cancel PMI at 78%, or $312,000, once you are current on payments. You can also request removal if your home appreciates to 80% of its current value, supported by an appraisal that typically costs $300 to $600.
Where do these terms show up in my paperwork? The rate vocabulary (note rate, APR, points, index and margin) appears on page one of the Loan Estimate. Cost terms (origination, title, prepaids, cash to close) appear on page two. The Closing Disclosure repeats every figure in final form at least three business days before closing, so use it to check each quoted number.
Which term changes my monthly payment the most? The note rate, because it drives principal and interest, which is the largest slice of the payment. On a $400,000 loan a quarter-point moves the payment about $65 a month, while a $300 change in annual property tax adds exactly $25 a month to the escrow portion. Both matter, but the rate compounds for 30 years.