Mortgage lending has its own language. Here are the most important terms explained in plain English.
A–D
Amortization: The schedule of payments over the life of your loan. Early payments are mostly interest; later payments shift toward principal.
APR (Annual Percentage Rate): The true annual cost of your loan, including fees, expressed as a percentage. Always higher than the note rate.
Appraisal: An independent estimate of your home’s market value, required by lenders.
ARM (Adjustable-Rate Mortgage): A loan where the interest rate is fixed initially then adjusts periodically.
Chain of Title: The complete history of ownership of a property. Lenders and title companies trace this before any transaction.
Closing Costs: Fees and expenses paid at the completion of a real estate transaction. Typically 2–5% of the loan amount.
Conventional Loan: A mortgage not guaranteed by a government agency (FHA, VA, USDA). Must conform to Fannie Mae/Freddie Mac guidelines.
DTI (Debt-to-Income Ratio): Total monthly debt payments divided by gross monthly income. The primary underwriting qualification metric.
E–L
Earnest Money: A good-faith deposit made by the buyer to demonstrate intent. Typically 1–3% of the purchase price.
Escrow: A third-party account where funds are held during the transaction. Also refers to your monthly impound for taxes and insurance.
Equity: The difference between your home’s value and what you owe. What you actually “own.”
FHA Loan: A mortgage insured by the Federal Housing Administration. Lower down payment and flexible qualifying.
LTV (Loan-to-Value Ratio): Your loan balance divided by the home’s value. 80% LTV means 20% equity.
M–P
MIP (Mortgage Insurance Premium): Insurance required on FHA loans regardless of down payment.
PITI: Principal, Interest, Taxes, Insurance — the four components of a full monthly mortgage payment.
PMI (Private Mortgage Insurance): Required on conventional loans with less than 20% down.
Points: Prepaid interest paid at closing in exchange for a lower interest rate. 1 point = 1% of loan amount.
Q–Z
Rate Lock: An agreement with your lender to hold a specific interest rate for a set period (usually 30–60 days).
Title Insurance: Protects lender (and optionally buyer) against title defects, liens, or ownership disputes.
Underwriting: The process of evaluating a borrower’s risk to determine loan approval, amount, and terms.
VA Loan: A mortgage guaranteed by the Department of Veterans Affairs. Available to eligible veterans and active military. No down payment, no PMI.