Mortgage paperwork uses a vocabulary of its own, and lenders use it quickly. Here are the terms that do the most work, in plain language. Keep it open while you read a Loan Estimate.
The Loan Itself
- Principal — the amount you borrowed and still owe, separate from the interest.
- Amortization — paying a loan off through regular payments, each split between interest and principal. Early payments are mostly interest; later ones are mostly principal.
- Term — how long the loan runs, commonly 15 or 30 years.
- Fixed-rate mortgage — the rate never changes.
- Adjustable-rate mortgage (ARM) — the rate is fixed for an introductory period, then adjusts on a schedule tied to a published index.
- Index and margin — on an ARM, your new rate is a published index plus a fixed margin. The margin does not change; the index does.
- Rate cap — the limit on how far an ARM’s rate can move, at the first adjustment, at each later one, and over the life of the loan.
- Prepayment penalty — a fee for paying the loan off early. Check whether yours has one.
Rate and Cost
- Interest rate — the percentage used to calculate the interest portion of your payment.
- Annual percentage rate (APR) — the rate plus points and most lender fees, expressed as a yearly percentage. Usually higher than the rate, and a better comparison figure between similar loans.
- Discount points — an optional upfront payment to buy a lower rate. One point is one percent of the loan amount. See what is a mortgage point.
- Rate lock — a lender’s commitment to hold a quoted rate for a set number of days. Ask what happens if it expires before closing.
- Closing costs — the fees to complete the loan and the sale: appraisal, credit report, title work, recording, lender charges and prepaid insurance and taxes. See closing costs explained.
Qualifying
- Down payment — the cash you put toward the price, with the rest financed.
- Loan-to-value ratio (LTV) — the loan divided by the property’s value. Borrow $240,000 against a $300,000 home and your LTV is 80 percent. See loan-to-value ratio.
- Debt-to-income ratio (DTI) — your monthly debt payments as a percentage of gross monthly income.
- Private mortgage insurance (PMI) — insurance protecting the lender when a conventional loan’s down payment is under 20 percent. It can usually be canceled as you build equity. See what is PMI.
- Pre-qualification — an informal estimate based on what you tell a lender.
- Pre-approval — a stronger, verified commitment based on documentation and a credit check. This is the one sellers take seriously.
- Underwriting — the lender’s formal review of your income, assets, credit and the property before final approval.
Closing and Ownership
- Escrow — two different meanings. During the sale, a neutral third party holds funds and documents. After closing, an escrow account is where your lender collects and pays your property taxes and insurance. See what is escrow.
- Earnest money — the deposit showing you are serious when your offer is accepted. See what is earnest money.
- Appraisal — an independent estimate of the property’s value, ordered by the lender.
- Contingency — a condition in the contract that must be satisfied, such as inspection or financing, or the deal can be canceled.
- Title — legal ownership. Deed — the document that transfers it.
- Lien — a legal claim against the property securing a debt. Your mortgage is one. See what is a lien.
- Equity — the property’s value minus what you owe on it. See what is equity.
- Loan Estimate and Closing Disclosure — the two standardized forms that let you compare offers and check the final terms against them.