Mortgage Glossary

A mortgage with an interest rate that changes periodically based on a benchmark index. ARMs typically start with a lower fixed rate for a set period (e.g., 5 years in a 5/1 ARM), then adjust annually. The rate can go up or down, which means your monthly payment can change.

The process of paying off a loan through regular monthly payments over time. Early payments are mostly interest; as the loan matures, more of each payment goes toward principal. An amortization schedule shows exactly how each payment is split.

The total yearly cost of a mortgage expressed as a percentage, including the interest rate plus lender fees, points, and mortgage insurance. APR gives you a more complete picture of loan cost than the interest rate alone. Always compare APR when shopping lenders.

A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the home is worth at least the loan amount. VA and FHA loans have specific appraisal requirements set by the government.

A refinance that replaces your existing mortgage with a larger loan, allowing you to take the difference in cash. Commonly used for debt consolidation, home improvements, or other major expenses. VA loans allow up to 90% LTV; conventional typically caps at 80%.

A document from the VA that confirms a veteran's eligibility for a VA loan. You can obtain your COE through VA.gov, your lender, or by mailing VA Form 26-1880. Your COE also shows whether you're exempt from the VA funding fee.

Fees and expenses paid at the closing of a real estate transaction, beyond the purchase price. Typically 2-5% of the loan amount. Includes lender fees, title insurance, appraisal, attorney fees, prepaid taxes, and insurance. Some closing costs are negotiable or can be rolled into the loan.

A five-page form that provides final details about your mortgage loan. It includes the loan terms, projected monthly payments, closing costs, and how much cash you need at closing. You must receive it at least 3 business days before closing.

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits. In 2026, the conforming loan limit is $832,750 in most areas and up to $1,249,125 in high-cost areas. Conforming loans typically offer better rates than non-conforming (jumbo) loans.

A mortgage not insured or guaranteed by a government agency (as opposed to FHA, VA, or USDA loans). Conventional loans typically require higher credit scores and larger down payments but offer more flexibility in terms and property types.

A numerical rating (typically 300-850) that represents your creditworthiness based on your credit history. FICO scores are most commonly used in mortgage lending. Higher scores qualify for better rates. Most conventional lenders require 620+; FHA accepts 580+ with 3.5% down; VA has no official minimum.

The percentage of your gross monthly income that goes toward debt payments, including the proposed mortgage. Calculated by dividing total monthly debts by gross monthly income. Most lenders prefer DTI below 43-50%. VA loans use residual income in addition to DTI.

A legal document that secures a mortgage loan by giving the lender an interest in the property. In some states, a deed of trust is used instead of a mortgage. It involves three parties: the borrower, the lender, and a neutral trustee.

Upfront fees paid to the lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount. Paying points makes sense if you plan to keep the loan long enough for the monthly savings to exceed the upfront cost (the break-even point).

The portion of a home's purchase price paid upfront in cash. Conventional loans typically require 3-20% down. FHA requires 3.5% with 580+ credit. VA and USDA loans offer $0 down for eligible borrowers. A larger down payment reduces the loan amount, monthly payment, and may eliminate PMI.

A deposit made by a buyer to demonstrate serious intent to purchase a home, typically 1-3% of the purchase price. Held in escrow and applied toward the down payment or closing costs at closing. May be forfeited if the buyer backs out without a valid contingency.

The difference between your home's current market value and the amount you owe on your mortgage. Equity grows as you pay down your loan and as your home appreciates in value. You can access equity through a cash-out refinance or home equity loan.

An account held by a third party (typically your loan servicer) that collects and pays property taxes and homeowners insurance on your behalf. A portion of each monthly mortgage payment goes into escrow. Also refers to the period between accepted offer and closing.

A mortgage insured by the Federal Housing Administration, designed for borrowers who may not qualify for conventional loans. Features include a minimum 3.5% down payment (with 580+ credit), more flexible DTI requirements, and lower credit score thresholds. Requires both upfront and annual mortgage insurance premiums (MIP).

A mortgage with an interest rate that remains the same for the entire loan term. The most common options are 15-year and 30-year fixed. Your principal and interest payment never changes, making budgeting predictable. Most popular choice for homebuyers who plan to stay long-term.

A one-time fee charged on VA loans to help fund the VA loan program. Ranges from 1.25% to 3.3% of the loan amount depending on down payment, first-use vs. subsequent use, and loan type. Can be rolled into the loan. Veterans with service-connected disabilities (10%+) are exempt.

A document that provides estimated costs associated with a mortgage loan. Largely replaced by the Loan Estimate form, but the term is still commonly used. Helps borrowers compare offers from different lenders.

A revolving line of credit secured by your home's equity. Works like a credit card: you draw what you need during a set period (usually 5-10 years), then enter a repayment period. Typically has a variable rate. Different from a home equity loan, which provides a lump sum at a fixed rate.

A second mortgage that lets you borrow a lump sum against your home's equity at a fixed interest rate. Repaid in fixed monthly payments over a set term (typically 5-30 years). Keeps your existing first mortgage intact, which is an advantage if your current rate is low.

Insurance that covers damage to your home and personal property from events like fire, theft, and certain natural disasters. Required by all mortgage lenders. Flood insurance is separate and required in designated flood zones. Annual premiums are typically escrowed into your monthly payment.

The percentage charged by a lender for borrowing money, expressed as an annual rate. Your interest rate determines how much of each payment goes to interest vs. principal. Different from APR, which includes additional fees. Even small rate differences (0.25%) can save or cost thousands over a 30-year loan.

A lender's commitment to hold a specific interest rate for a set period (typically 30-60 days) while your loan processes. Protects you from rate increases during that window. Some lenders offer float-down options if rates drop after locking.

The Interest Rate Reduction Refinance Loan, a VA-specific program that lets veterans refinance an existing VA loan to a lower rate with minimal documentation. No appraisal required, no income verification in most cases. Also known as a VA Streamline Refinance. Only available for existing VA loans.

A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac ($832,750 in most areas for 2026). Because they can't be purchased by Fannie/Freddie, jumbo loans typically have stricter credit requirements, larger down payments, and slightly higher rates.

A standardized three-page form that lenders must provide within 3 business days of receiving your mortgage application. Shows estimated interest rate, monthly payment, closing costs, and loan terms. Use it to compare offers from multiple lenders on an apples-to-apples basis.

The ratio of your mortgage amount to the property's appraised value, expressed as a percentage. An $320,000 loan on a $400,000 home = 80% LTV. Lower LTV means less risk for lenders, which can mean better rates and no PMI. VA loans allow up to 100% LTV.

Insurance required on FHA loans that protects the lender if you default. Includes an upfront premium (1.75% of the loan, usually rolled in) and an annual premium (0.55-1.05% depending on LTV and term) paid monthly. For most FHA loans originated after June 2013, MIP lasts the life of the loan.

A fee charged by the lender for processing a new mortgage, typically 0.5-1% of the loan amount. Covers the lender's administrative costs. This is one component of closing costs and should be compared across lenders when shopping for a mortgage.

A lender's conditional commitment to lend you a specific amount based on a review of your credit, income, assets, and debts. Stronger than pre-qualification because it involves actual verification. Most sellers and agents prefer buyers with pre-approval letters.

An initial estimate of how much you might be able to borrow, based on self-reported financial information. Less rigorous than pre-approval — no documents are verified. Useful as a starting point to understand your budget, but not as strong as a pre-approval in competitive markets.

The amount of money you borrow for your mortgage (or the remaining balance you owe). Each monthly payment includes principal and interest. Early in the loan, most of your payment goes to interest; over time, more goes toward reducing principal.

Insurance required on conventional loans when the down payment is less than 20%. Protects the lender (not you) if you default. Typically costs 0.5-1.5% of the loan amount annually. Can be removed once you reach 20% equity. VA loans never require PMI.

An annual tax levied by local governments based on the assessed value of your property. Rates vary significantly by location (0.3% to 2.5%+ of home value). Usually escrowed into your monthly mortgage payment. Factor this into your budget — it can add hundreds per month.

See Interest Rate Lock.

Replacing your existing mortgage with a new one, typically to get a lower rate, change the loan term, switch from adjustable to fixed rate, or access equity (cash-out). Involves closing costs similar to the original mortgage. Makes financial sense when savings exceed the costs.

The amount of money left over each month after paying all major expenses (mortgage, taxes, insurance, debts, utilities, maintenance). The VA uses residual income as an additional qualification metric beyond DTI. Requirements vary by family size and geographic region. Can help veterans qualify even with higher DTI ratios.

A mortgage taken out on a property that already has a first mortgage. Home equity loans and HELOCs are common types. The second mortgage is subordinate to the first — if the home is sold in foreclosure, the first mortgage is paid first.

A simplified refinance process with reduced documentation requirements. Available for FHA loans (FHA Streamline) and VA loans (IRRRL). Typically doesn't require a new appraisal or income verification, resulting in faster closings and lower costs.

Federal law that regulates telemarketing calls, auto-dialed calls, prerecorded calls, text messages, and unsolicited faxes. In the mortgage industry, TCPA compliance means obtaining documented consent before contacting consumers. Recent FCC rulings require one-to-one consent for lead generation.

Insurance that protects against financial loss from defects in a property's title (ownership history). There are two types: lender's title insurance (required by lender) and owner's title insurance (optional but recommended). Paid as a one-time fee at closing.

The process a lender uses to evaluate the risk of making a mortgage loan. An underwriter reviews your credit, income, assets, employment, property appraisal, and other factors to decide whether to approve the loan. Automated underwriting systems (AUS) speed up initial decisions, but complex cases may require manual review.

A mortgage guaranteed by the U.S. Department of Agriculture for eligible rural and suburban homebuyers. Offers $0 down payment, competitive rates, and reduced mortgage insurance. Income limits apply (typically 115% of area median income). Property must be in an eligible rural area.

A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and qualifying surviving spouses. Features include $0 down payment, no PMI, competitive rates, and flexible credit requirements. Available for purchase, refinance, and cash-out refinance.