Glossary of Mortgage Terms
Mortgage Term Glossary
Understanding the terminology used in the mortgage process can feel overwhelming. This glossary breaks down common mortgage terms into easy-to-understand definitions, empowering you to navigate the homebuying journey with confidence.
Adjustable-Rate Mortgage (ARM): An ARM's interest rate fluctuates over the loan term, typically based on a financial index.
Amortization: The process of gradually paying off a loan through fixed monthly payments that cover both principal (the original loan amount) and interest.
Annual Percentage Rate (APR): The cost of borrowing money over a year, expressed as a percentage, that includes the interest rate and any additional fees associated with the loan.
Closing Costs: One-time fees paid at the closing of a mortgage loan, typically including origination fees, appraisal fees, title insurance, and government recording fees.
Debt-to-Income Ratio (DTI): A measure of your monthly debt obligations compared to your gross monthly income, expressed as a percentage. A lower DTI generally improves your chances of qualifying for a mortgage.
Down Payment: The upfront portion of the purchase price you pay out of pocket, reducing the amount you need to borrow through a mortgage.
Equity: The difference between the market value of your home and the remaining balance on your mortgage.
Escrow: An account held by a neutral third party where your property taxes and homeowners insurance premiums are collected until they are due.
Federal Housing Administration (FHA) Loan: A government-backed loan with more lenient credit score and down payment requirements compared to conventional loans.
Fixed-Rate Mortgage: A mortgage with a fixed interest rate that remains the same throughout the loan term, providing predictable monthly payments.
Loan-to-Value Ratio (LTV): The ratio of your loan amount to the appraised value of your home, expressed as a percentage. A lower LTV generally leads to better loan terms.
Origination Fee: A one-time fee charged by the lender for processing your mortgage application.
Private Mortgage Insurance (PMI): Mortgage insurance required when your down payment is less than 20% of the purchase price, protecting the lender if you default on the loan.
Principal: The original amount of money borrowed through the mortgage.
Title Insurance: Protects the lender and homeowner against any ownership defects or outstanding liens on the property.
Underwriting: The process by which a lender evaluates your financial situation to determine your eligibility for a mortgage and loan terms.
This glossary provides a basic understanding of common mortgage terms. It's recommended to consult a mortgage professional for personalized guidance throughout the homebuying process.