Deciding to buy a home might be simple, but the process of getting a home loan can be complex and full of unfamiliar mortgage terminology. That’s why we’ve broken down some of the new mortgage terms you might hear along the way so you can feel more confident during the home buying process.
Here’s a mortgage glossary of 30 common home loan terms you should know:
Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage, or ARM, is a type of home loan where the interest rate changes over time. The borrower initially pays a fixed interest rate for a certain number of years. When the fixed period ends, the rate can increase or decrease periodically for the rest of the loan term.
An ARM is expressed as two numbers:
- The first digit refers to the length of time the rate is fixed
- The second digit indicates how often the rate can reset
With a 5/1 ARM, for example, you’ll receive a fixed rate for the first five years of the loan. Then, based on several factors, the rate may increase or decrease once a year for the rest of your loan term.
While Credible doesn’t offer adjustable-rate mortgages, it can help you compare great home loan rates on conventional, fixed-rate mortgages and give you a better idea of how much you can afford. In just a few minutes, you can see personalized, prequalified rates from all of our partner lenders.
Amortization is the process of paying off debt in equal installments over time. When you take out a home loan, you’ll make regular monthly payments that follow an amortization schedule.
The schedule will dictate how much of your monthly payment goes toward principal and interest each month. In the beginning of the loan term, more of your monthly mortgage payment goes toward interest.
Annual percentage rate (APR)
An annual percentage rate, often shortened to APR, is your interest rate expressed as a yearly rate. It has two main components:
- Interest rate: Cost you pay every year to take out a home loan
- Lender fees: What you pay to take out the loan, such as discount points, mortgage broker fees, and other charges
An APR is a good way to compare mortgage offers because it’s a broader measure of your homebuying costs.
Closing costs are fees you pay the lender to originate, underwrite, and close your mortgage. These vary with every lender and every individual mortgage, but average closing costs range from about 2% to 5% of your home’s purchase price.
When you apply for a mortgage, the lender will hand you a loan estimate that lists all your closing costs. Some of these include:
- Appraisal fees
- Origination fees
- Title insurance
- Survey fee
- Credit report fee
A closing disclosure is a five-page form that your lender will give you at least three business days before closing on a home loan. It includes the final terms and costs of the mortgage, such as:
- Annual percentage rate and interest rate
- Your projected monthly payment
- Lender fees
- Closing costs
When you receive this document, compare the information with your loan estimate. If anything has changed or you have questions, ask your lender before you go to the closing table.
A conventional loan is a type of mortgage that’s not guaranteed by a government agency (like FHA, VA, and USDA loans are).
Conventional loans can either be conforming or non-conforming. Here’s a quick breakdown of how these types of loans differ:
- Conforming loans fit within financing limits set by the Federal Housing Finance Agency. In most of the country, that limit is $647,200 for one-unit properties.
- Non-conforming loans have a balance that exceed the conforming limit. These are also called jumbo loans, and because Fannie Mae and Freddie Mac won’t buy jumbo loans, they often come with higher interest rates than conforming loans.
Debt-to-income ratio (DTI)
A debt-to-income ratio measures how much of your monthly income goes toward debt. Lenders use this number to determine whether you have room in your budget to take on a mortgage.
There are two types of DTI ratios:
- Front-end DTI: Accounts for your housing-related debts, which include costs like your expected new mortgage payment, taxes, and insurance.
- Back-end DTI: Measures all of your debt, including housing costs.
Lenders tend to focus more on the back-end DTI, and they’ll usually set a maximum DTI ratio to qualify for a home loan. For a conventional home loan, borrowers often need a DTI ratio of 43% or less.
A deed is a legal document that shows who owns a piece of real estate and when it changes ownership. A mortgage deed allows the bank to put a lien on your property to secure the loan, which means the bank can foreclose on your home if you default on payments.
Once you pay the loan in full, the lender records the deed in the county property records office.
Discount points, sometimes called mortgage points, are an optional fee you can pay the lender to lower your interest rate.
One mortgage point typically equals 1% of the home’s purchase price. So on a $200,000 home, you could pay $2,000 to buy one point. How much the lender lowers your rate will vary, but 1 point usually lowers your rate by 0.25%.
A down payment is a percentage of your home’s purchase price that you pay the lender when you close on a home loan. This is your initial investment in your home.
Generally, putting down a larger amount can help you receive a lower interest rate. And if you can put down at least 20% on a conventional loan, you won’t have to pay for private mortgage insurance.
Earnest money is a deposit you can make on a home to show the seller you’re serious about the offer. The amount of the deposit varies with every market, but it’s typically equal to 1% to 2% of the home’s listing price.
Here’s how it works: The seller deposits the money in an escrow account after each party signs the purchase and sale agreement. Then, the money is disbursed at closing and can be used toward the down payment or closing costs.
Home equity is the part of your home that you own, calculated as the difference between what your home could sell for and the balance on your mortgage.
Your home equity starts with your down payment and builds over time as your home naturally appreciates in value and you pay down your mortgage.
Escrow is a type of account that’s used to store money during the homebuying process. You might encounter an escrow account when:
- You provide earnest money: When you give earnest money to the seller, your funds will be kept in an escrow account. The funds will be disbursed when you either close on the home or back out of the transaction.
- Your lender collects property taxes and homeowners insurance: The lender will take these costs from your monthly loan payment, keep the money in your escrow account, and pay these bills on your behalf.
An FHA loan is a mortgage that’s insured by the Federal Housing Administration. These loans are designed for low- to moderate-income borrowers.
If you can put down at least 10% of the home’s selling price, you may qualify for an FHA mortgage with a credit score as low as 500. With a credit score of at least 580, you can put down 3.5% or more.
A fixed-rate mortgage is a type of home loan where the interest rate stays the same throughout the life of the loan. The amount that goes toward principal and interest will vary with each mortgage payment, but the total payment remains the same. This predictability makes budgeting easier for homeowners.
A home appraisal is a professional opinion of a home’s value. Before you close on a home loan, your lender will order an appraisal to make sure the value of the home lines up with the amount you’re borrowing.
If the appraisal comes in below the price of the home, you’ll either need to negotiate with the seller before moving forward with the mortgage, challenge the appraisal, or request a new one altogether.
A home inspection is an evaluation of a home’s condition. After you agree to buy a piece of property, you can order an inspection to check for potential problems before closing on a home loan.
During the inspection, a professional inspector will walk through the interior and exterior and check the home’s structural features, plumbing, and electrical systems. They’ll then hand you a report that lists any issues.
The interest rate is the cost you pay each year to borrow money, expressed as a percentage. It doesn’t include fees and other charges you may have to pay for the mortgage.
A jumbo loan is a mortgage for an amount that exceeds limits set by the Federal Housing Finance Agency. In most of the country, jumbo loans are mortgages that exceed $548,250 for one-unit properties in 2021.
A loan estimate is a three-page form a lender must give you within three business days of applying for a mortgage. This document includes important information such as:
- The estimated interest rate
- Your monthly payment
- Total closing costs
- Estimated costs of taxes and insurance
- Whether the interest rate and payments may change in the future
Loan-to-value ratio (LTV)
A loan-to-value ratio measures the amount you’re borrowing against the value of the home. For example, say your loan amount is $160,000 and you’re buying a house worth $200,000. Your LTV ratio at the time of purchase is calculated as: ($160,000/$200,000) x 100 = 80%.
Lenders use this number to measure the risk they’re taking on with a mortgage. Generally, a higher LTV indicates more risk.
A mortgage pre-approval is a letter from a lender that says how much you can borrow. This can help you shop for homes within your price range and show buyers you’re serious about your offer.
To get one, you’ll need to contact a lender, request a pre-approval, and provide documentation of your income, employment, assets, and debts. After reviewing your documents and pulling your credit, the lender will let you know if you’re pre-approved and how much you can borrow.
On a mortgage, the principal is the amount you borrow from a lender. You pay back this amount over time through your monthly mortgage payments.
Private mortgage insurance (PMI)
Private mortgage insurance is a type of insurance that protects the lender in case you default on the loan. You might have to pay PMI if:
- You take out a conventional loan with a down payment of less than 20%
- You refinance and your equity is less than 20% of the value of your home
Seller concessions are closing costs the seller may agree to pay as an incentive for you to make an offer.
Here are some examples of concessions a seller may pay:
- Property taxes through the end of the year
- Title insurance
- Origination fees
- Inspection fees
- Recording fees
- Appraisal fee
- Attorney’s fees
- Mortgage points
A title is your legal right to ownership of the property. It also shows if there are any liens on the property.
A title company will perform a title search to ensure the title is clear and without any defects. After you close on a home loan, your mortgage will be listed on the title as a lien.
Title insurance is a type of insurance that protects the policyholder against issues that would affect legal ownership of the property.
There are two main types of title insurance policies:
- Lender’s title insurance protects your lender against problems with the title. Most lenders require you to purchase a lender’s title insurance policy.
- Owner’s title insurance protects you, the homebuyer. This policy is optional but often recommended, as it can protect you from any potential title defects.
A USDA loan is a type of mortgage that’s insured by the U.S. Department of Agriculture. They’re designed for low- to moderate-income homebuyers who agree to live in eligible rural and suburban areas. USDA mortgages don’t require a down payment or minimum credit score to qualify.
VA loans are available to active-duty service members, veterans, and eligible surviving spouses. They’re backed by the U.S. Department of Veterans Affairs and have no down payment or minimum credit score requirements. You won’t pay mortgage insurance — instead you’ll need to pay a one-time funding fee at closing.
You won’t find VA loans at Credible, but if you’re looking for a great rate on a conventional loan, we can help with that. It only takes a few minutes to compare personalized, prequalified rates from all of our partner lenders.