The scheduled process of paying off a loan through regular payments over time. Each payment is split between interest (the lender's profit) and principal (reducing what you owe). In the early years, the vast majority of every payment goes to interest. This flips in the final years.
An independent licensed appraiser's professional estimate of a property's fair market value. Lenders require this before approving any mortgage to confirm the property is worth the loan amount. If the appraisal comes in low, you may need to renegotiate the purchase price or bring extra cash to closing.
The true all-in yearly cost of a mortgage, expressed as a percentage. Unlike the raw interest rate, APR folds in lender fees, mortgage broker fees, and discount points. Always compare APR across lenders — not just the rate — to see the real cost of each offer.
A home loan where the interest rate is fixed for an initial period (e.g., 5 or 7 years), then adjusts annually based on a market index like SOFR. ARMs carry a cap structure (e.g., 2/2/5) that limits how much the rate can jump at each adjustment and over the loan's lifetime.
All the fees and expenses paid at the end of a real estate transaction, beyond the down payment. Closing costs typically range from 2% to 5% of the loan amount and include lender origination fees, title insurance, appraisal, prepaid property taxes, homeowners insurance, and escrow setup.
Upfront fees paid to a lender at closing to permanently buy down your interest rate. One point equals 1% of the loan amount. Each point typically reduces your rate by 0.25%, though this varies. The key question: will you break even before you sell or refinance?
A lender's primary measure of your ability to handle monthly debt payments relative to your gross income. Front-end DTI covers only your housing payment. Back-end DTI covers all monthly debts (housing + car + student loans + credit cards). Most conventional loans require back-end DTI below 43–45%.
An escrow account is managed by your lender and used to collect and pay property taxes and homeowners insurance on your behalf. A portion of each monthly payment goes into this account. Lenders require it to ensure taxes and insurance are always paid — protecting the collateral they hold.
A mortgage insured by the Federal Housing Administration, designed for buyers with lower credit scores or smaller down payments. FHA requires as little as 3.5% down with a 580+ credit score, or 10% down with a 500–579 score. The trade-off: mandatory mortgage insurance premiums (MIP) for the life of the loan in most cases.
A home loan where the interest rate is locked for the entire loan term — typically 15 or 30 years. Your principal and interest payment never changes regardless of market conditions, making budgeting predictable. The 30-year fixed is the most common mortgage in the US.
A revolving credit line secured by your home's equity. Like a credit card, you draw and repay as needed during the draw period (usually 10 years), then repay the balance over the repayment period (usually 20 years). Rates are almost always variable, tied to the Prime Rate, which makes HELOCs risky when rates rise.
The portion of your home's value you actually own, calculated as current market value minus your outstanding mortgage balance. Equity grows two ways: through principal paydown with each mortgage payment, and through home price appreciation. It is the primary source of generational wealth for most US families.
The ratio of your loan amount to the property's appraised value, expressed as a percentage. LTV is the most important risk metric for lenders. Higher LTV = higher risk = higher rates and stricter requirements. Below 80% LTV eliminates the need for PMI. Below 60% LTV often unlocks the best available rates.
A lender's preliminary commitment to lend you up to a specific amount, after reviewing your income documents, credit report, and assets. Unlike a pre-qualification (which is informal), a pre-approval involves a hard credit pull and real underwriting. Sellers in competitive markets will not take your offer seriously without one.
Insurance you pay to protect the lender (not you) if you default, required on conventional loans when LTV exceeds 80%. PMI typically costs 0.5%–1.5% of the loan amount per year and is added to your monthly payment. You can request removal once your LTV reaches 80%, and it automatically cancels at 78% under federal law.
The original amount borrowed, or the outstanding balance still owed on a mortgage, not including interest. Each payment reduces the principal by a small amount. Early in the loan, almost nothing goes to principal — the math is deliberately front-loaded with interest due to how amortization works.
Replacing your existing mortgage with a new one, typically to get a lower interest rate, reduce monthly payments, shorten the loan term, or pull out equity (cash-out refinance). Refinancing resets the amortization clock and involves closing costs of 2–5%. The break-even point determines whether it's worth doing.
A one-time policy purchased at closing that protects against hidden defects in a property's ownership history — such as unpaid taxes, undisclosed heirs, forged deeds, or recording errors. Lender's title insurance is required by your lender. Owner's title insurance is optional but strongly recommended.
The formal process where a lender's underwriter verifies all your financial information — income, employment, assets, debts, and property appraisal — before issuing final loan approval. The underwriter's job is to confirm the loan meets investor guidelines (Fannie Mae, Freddie Mac, FHA, etc.). Conditions issued during underwriting must be satisfied before closing.
A mortgage guaranteed by the US Department of Veterans Affairs, available to eligible active-duty military, veterans, and surviving spouses. VA loans require zero down payment, no PMI, and typically offer the most competitive rates available — often 0.5–1% below conventional rates. The trade-off is a one-time VA funding fee (1.25%–3.3%).
A loan that allows a buyer to take over the seller's existing mortgage, including its interest rate and remaining balance. This is extremely valuable when the seller locked in a rate like 3% and current rates are 7%. VA and FHA loans are assumable; most conventional loans are not.
A short-term loan (typically 6–12 months) that uses your current home's equity to fund the purchase of a new home before your old home sells. Expensive — rates are often 8–11% — but solves the timing gap between buying and selling.
A refinance where you borrow more than you owe on your current mortgage and pocket the difference as cash. You're converting built-up equity into liquid money. The new loan is larger, so your payment likely increases. Best used for high-ROI purposes like home improvements, not consumer debt.
A second person who signs the mortgage and shares equal legal responsibility for repayment. Unlike a co-signer, a co-borrower typically also has ownership interest in the property. Their income, assets, and credit all count — which can help qualification but also means their debts count against DTI too.
A mortgage that meets Fannie Mae and Freddie Mac's standards for size and credit quality, allowing them to purchase it from lenders. For 2025, the conforming loan limit is $806,500 in most areas (higher in high-cost markets). Conforming loans typically offer the best rates.
A condition written into a purchase contract that must be satisfied before the sale can close. Common contingencies include financing (buyer must get a mortgage), inspection (buyer can walk if major defects are found), and appraisal (property must appraise at purchase price). Waiving contingencies strengthens offers but increases buyer risk.
A 300–850 number that summarizes your creditworthiness based on payment history, amounts owed, credit age, new credit, and credit mix. Mortgage lenders use your middle score from all 3 bureaus. Every 20-point improvement can mean a lower rate tier. Below 620 disqualifies most conventional loans.
A legal document used in many states (including California, Texas, Colorado) instead of a traditional mortgage. It involves three parties: borrower, lender, and a neutral third-party trustee who holds the property title until the loan is repaid. Allows non-judicial foreclosure, making the process faster for lenders.
A good-faith deposit paid by the buyer when submitting a purchase offer, typically 1–3% of the purchase price. It shows the seller you're serious. The deposit is held in escrow and applied to closing costs or down payment at closing. If you back out without a valid contingency, you forfeit it.
Government-Sponsored Enterprises that buy conforming mortgages from lenders, package them into mortgage-backed securities, and sell them to investors. This process replenishes lender capital so they can issue new loans. They don't lend directly to consumers but set the standards that most lenders follow.
An organization in planned communities, condos, or subdivisions that enforces rules and collects fees to maintain common areas and amenities. Monthly HOA dues count toward your debt-to-income ratio. Some HOAs charge special assessments for major repairs. High HOA fees directly reduce how much house you can afford.
The annual cost charged by a lender to borrow money, expressed as a percentage of the loan balance. Unlike APR, the interest rate does not include fees — it is just the cost of the money itself. On a fixed mortgage, this rate never changes. On an ARM, it adjusts after the initial fixed period.
A mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac ($806,500 in most areas for 2025). Because Fannie and Freddie won't buy them, lenders hold jumbo loans on their balance sheets, making them riskier and typically requiring higher credit scores (720+), larger down payments (10–20%), and more reserves.
A standardized 3-page federal disclosure document that lenders must provide within 3 business days of receiving a loan application. It details your estimated interest rate, monthly payment, closing costs, and loan terms. Use it to compare offers side-by-side. Numbers can change slightly at closing, but significant changes must be re-disclosed.
The FHA version of mortgage insurance. Unlike conventional PMI which cancels at 80% LTV, FHA MIP typically lasts the life of the loan if you put down less than 10%. It has two components: an upfront premium (1.75% of loan, usually rolled in) and an annual premium (0.55%–1.05% depending on loan size and term).
A lender fee charged for processing and underwriting your loan, typically 0.5%–1% of the loan amount. It covers the lender's cost of creating the loan. Sometimes called 'points' (but these are origination points, not discount points). Always visible on Page 2 of your Loan Estimate under Section A.
The acronym for the four components of a total monthly mortgage payment: Principal (reducing the loan balance), Interest (lender profit), Taxes (property taxes via escrow), and Insurance (homeowners insurance via escrow). PITI is what lenders use to calculate your front-end DTI ratio.
A fee charged by some lenders if you pay off your mortgage early — either by selling, refinancing, or making extra principal payments. Most conventional, FHA, VA, and USDA loans legally cannot have prepayment penalties. However, some non-QM and private loans still include them. Always check before signing.
A lender's guarantee to hold a specific interest rate for a set period (typically 30, 45, or 60 days) while your loan is processed. If rates rise during that period, you still get the locked rate. If rates fall, you typically don't benefit unless you have a float-down option. Longer locks cost more.
Money left in your bank accounts after paying your down payment and closing costs. Lenders verify reserves to ensure you can handle financial emergencies without defaulting. Reserves are measured in 'months of PITI.' Conventional loans typically require 2 months; jumbo loans may require 12+ months.
The Secured Overnight Financing Rate, which replaced LIBOR in 2023 as the primary index used to set adjustable-rate mortgage (ARM) rates after the initial fixed period. Your ARM rate = SOFR index + lender's margin. If SOFR is 5.3% and the margin is 2.5%, your new rate would be 7.8%.
A zero-down-payment mortgage backed by the US Department of Agriculture for buyers in eligible rural and suburban areas. USDA loans have income limits (typically 115% of area median income) and property location requirements. They charge an upfront guarantee fee (1%) and annual fee (0.35%) instead of PMI.
How legal ownership of a property is held and who inherits it. Common vesting types: Sole Ownership (one person), Joint Tenancy (equal shares, right of survivorship), Tenants in Common (unequal shares possible, no survivorship), and Community Property (married couples in certain states). Vesting affects taxes and estate planning.
Local government regulations that dictate how land and buildings can be used. Residential zones (R1, R2, etc.) allow single-family or multi-family homes. Mixed-use, commercial, or agricultural zones have different rules. Zoning affects what you can build, renovate, or operate on a property — and impacts mortgage eligibility.
A category of mortgage with specific features and limits set by the CFPB under the Dodd-Frank Act. QM loans cannot have risky features like negative amortization, interest-only periods, balloon payments, or terms beyond 30 years. They also cap points and fees at 3% for loans over $100K. QM status gives lenders legal protection.