Glossary of Mortgage Terms
Understanding the language of mortgages is the first step toward homeownership without fear. Familiarize yourself with these essential terms to make informed decisions.
Adjustable-Rate Mortgage (ARM)
A mortgage in which the interest rate is applied on the outstanding balance and varies throughout the life of the loan. Typically, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly.
Amortization
The process of paying off a debt over time through regular payments. An amortization schedule shows how much of each payment goes toward the principal and how much goes toward interest.
Debt-to-Income Ratio (DTI)
A personal finance measure that compares an individual's monthly debt payment to their monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. Lenders use it to determine a borrower's risk level.
Discount Points
Fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called "buying down the rate," which can lower your monthly mortgage payments.
Down Payment
An initial, upfront payment made when buying a home. It is typically expressed as a percentage of the total purchase price. For example, a 20% down payment on a $300,000 home is $60,000.
Escrow
A legal arrangement in which a third party temporarily holds money or property until a particular condition has been met (such as the fulfillment of a purchase agreement). In a mortgage, an escrow account is often used to pay property taxes and insurance on behalf of the homeowner.
Fixed-Rate Mortgage
A mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated.
Homeowners Association (HOA) Fees
Monthly or annual fees paid by owners of certain types of residential properties (such as condos, townhouses, and some single-family home developments) to an organization that assists with maintaining and improving the property and its environment.
Homeowners Insurance
A form of property insurance that covers losses and damages to an individual's residence, along with furnishings and other assets in the home. It also provides liability coverage against accidents in the home or on the property.
Interest
The cost of borrowing money. It is typically expressed as an annual percentage rate (APR). A portion of your monthly mortgage payment goes toward paying the interest.
Loan-to-Value Ratio (LTV)
A financial assessment that lenders examine before approving a mortgage. It is calculated by dividing the loan amount by the appraised value or purchase price of the property, whichever is lower.
Origination Fee
An upfront fee charged by a lender to process a new loan application, used as compensation for putting the loan in place. Origination fees are quoted as a percentage of the total loan and are generally between 0.5% and 1% on mortgage loans in the US.
Principal
The amount of money you borrowed to buy the home. A portion of your monthly mortgage payment goes toward paying down the principal balance.
Private Mortgage Insurance (PMI)
A type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan. PMI is usually required when you have a conventional loan and make a down payment of less than 20% of the home's purchase price.
Property Taxes
Taxes paid by anyone who owns property such as land, a home or commercial real estate. These taxes are typically calculated by local governments and are based on the assessed value of the property.