Mortgage glossary

45 terms, defined in plain English and grouped by where you actually meet them. Every definition here is the same one the MCP server gives an AI assistant, so a person and an agent get the same answer.

Your monthly payment

Amortization#: The schedule by which a loan is repaid, splitting each payment between interest and principal. The payment stays level while the split shifts steadily toward principal.; Early payments are mostly interest because interest is charged on the outstanding balance. On a 30-year loan, roughly the first decade builds equity slowly.; See alsoPrincipal Extra principal payment
Biweekly payment#: Paying half the monthly amount every two weeks, which produces 26 half-payments — 13 monthly payments — a year.; The extra annual payment is the entire effect. Paying one-twelfth extra each month achieves the same thing without a servicer's setup fee.
Equity#: The difference between a property's market value and the balance owed on it.
Extra principal payment#: Money paid above the scheduled amount that goes directly to reducing the balance, shortening the loan.; It shortens the term rather than reducing the monthly payment. The effect is largest early in the loan, when the balance — and so the interest it generates — is highest.
HOA duesHomeowners Association dues#: Recurring fees paid to an association that maintains shared areas and enforces community rules.; Not part of the mortgage and not held in escrow, but lenders count them in qualifying ratios, so they reduce how much can be borrowed.
PITIPrincipal, Interest, Taxes and Insurance#: The four components of a typical monthly mortgage payment. Principal repays the loan, interest is the cost of borrowing, and taxes and insurance are usually collected monthly into an escrow account.; Quoted mortgage payments often mean principal and interest only. PITI is the figure that matters for budgeting, and it can be substantially higher.; See alsoEscrow Property tax Homeowners insurance
Principal#: The amount borrowed, and the portion of each payment that reduces the balance owed.
Recast#: Re-amortizing an existing loan after a large principal payment, lowering the monthly payment while keeping the original rate and term.; Cheaper and simpler than refinancing when the aim is a lower payment rather than a lower rate, but not every servicer offers it.

Qualifying for a loan

Back-end ratio#: All monthly debt payments including housing, as a percentage of gross monthly income. 36% is conservative; lenders often allow 45% and sometimes 50% with compensating factors.; Approval at 45% or above is survivable but leaves little room for saving, and a household at that level is one job loss or major repair from difficulty.
Down payment#: Cash paid up front toward the purchase price, with the rest borrowed.; 20% is not required. It is simply the threshold above which conventional loans carry no PMI.
DTIDebt-to-Income ratio#: Total monthly debt payments as a percentage of gross monthly income, the primary measure lenders use to size a loan.; Two ratios are usually applied: front-end covers housing alone, back-end covers all debt. The lower of the two limits binds, and for most borrowers with car or student loans it is the back-end.; See alsoFront-end ratio Back-end ratio
Front-end ratio#: Housing costs as a percentage of gross monthly income. 28% is the conservative standard.
LTVLoan-to-Value ratio#: The loan amount as a percentage of the property's value. A 20% down payment produces an 80% LTV.; Drives mortgage insurance, pricing and eligibility. The 80% and 78% thresholds are where conventional PMI can be removed.; See alsoPMI

Types of loan

Conforming loan limit#: The largest loan amount Fannie Mae and Freddie Mac will buy, set annually and higher in expensive counties.; Loans above it are jumbo loans, which are priced and underwritten separately.
Conventional loan#: A mortgage not insured or guaranteed by a government agency, typically conforming to Fannie Mae and Freddie Mac standards.
FHA loan#: A mortgage insured by the Federal Housing Administration, allowing down payments as low as 3.5% and lower credit scores than most conventional programmes.; The trade is mortgage insurance that is usually permanent. Often the only realistic route below roughly a 620 credit score.; See alsoMIP UFMIP
Jumbo loan#: A mortgage above the conforming loan limit, held by the lender or sold privately rather than to the agencies.
USDA loan#: A mortgage guaranteed by USDA Rural Development for eligible rural and suburban properties, requiring no down payment.; Both the property location and the household income must qualify, and the eligible areas are broader than 'rural' suggests.
VA loan#: A mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans and some surviving spouses, requiring no down payment and no monthly mortgage insurance.; See alsoVA funding fee

Rates and pricing

APRAnnual Percentage Rate#: The cost of borrowing expressed as a yearly rate, including the interest rate plus lender fees and points.; Comparing APR rather than the headline rate is what makes two lender quotes comparable, since one may be hiding fees the other charges openly.; See alsoDiscount points
ARMAdjustable-Rate Mortgage#: A mortgage with an interest rate fixed for an initial period, after which it adjusts periodically against an index.; Described by two numbers, as in 5/1: five years fixed, then annual adjustments. Caps limit each adjustment and the lifetime rate, and those caps matter more than the starting rate.
Discount points#: Prepaid interest bought at closing to lower the rate, each costing 1% of the loan and typically reducing the rate by about 0.25%.; Worth it only if the loan is kept past the break-even point. Sell or refinance before then and the money is simply gone.
Fixed-rate mortgage#: A mortgage whose interest rate does not change for the life of the loan.; The principal and interest portion is fixed; the total payment still moves as taxes and insurance change.

Insurance

Homeowners insurance#: Property insurance covering damage to the home and liability, required by every mortgage lender.; See alsoPITI Escrow
MIPMortgage Insurance Premium#: The FHA equivalent of PMI, charged both as an upfront premium of 1.75% of the loan and as an annual premium collected monthly.; Unlike conventional PMI, FHA MIP runs for the life of the loan unless the original down payment was at least 10%, in which case it ends after 11 years. Refinancing to a conventional loan is the usual way out.; See alsoPMI UFMIP FHA loan
PMIPrivate Mortgage Insurance#: Insurance a conventional borrower pays to protect the lender when the down payment is under 20%. It protects the lender, not the borrower.; Cancellable: a borrower may request removal at 80% loan-to-value, and the lender must drop it automatically at 78%, both measured against the original purchase price.; See alsoMIP LTV
UFMIPUpfront Mortgage Insurance Premium#: The FHA's one-time charge of 1.75% of the base loan amount, normally financed into the loan balance rather than paid in cash.; Because it is financed, an FHA borrower owes more than the purchase price minus their down payment from day one.
VA funding fee#: A one-time fee on VA loans that takes the place of monthly mortgage insurance, tiered by down payment and by whether entitlement has been used before.; Waived entirely for veterans receiving compensation for a service-connected disability, those entitled to it but for retirement pay, and certain surviving spouses. With the fee waived, a VA loan is very hard to beat.

Property tax

Assessed value#: The value a local assessor assigns to a property for tax purposes, which is often a fixed percentage of market value rather than market value itself.; Many states cap how fast assessed value can rise, so a long-held property can be taxed on far less than it would sell for.
Effective tax rate#: Annual property tax as a percentage of a home's market value, which allows comparison between states with different assessment practices.
Homestead exemption#: A reduction in the taxable value of an owner-occupied primary residence, available in most states.; Usually has to be applied for, and often only once. Buyers routinely miss the filing deadline in their first year and pay more tax than they need to.
Mill rate#: A property tax rate expressed in dollars per thousand dollars of assessed value. One mill is one dollar per thousand, or 0.1%.
Property tax#: An annual tax levied on real estate by local government, based on the assessed value of the property.; Set locally, not by the state. County, city and school district rates can differ by a factor of two or three within a single state, so a statewide average is only a starting point.; See alsoAssessed value Mill rate Homestead exemption

Buying and closing

Appraisal#: An independent valuation of the property, ordered by the lender to confirm it is worth enough to secure the loan.; An appraisal below the agreed price forces a renegotiation, a larger down payment, or the deal falls through.
Break-even point#: The number of months of savings needed to recover an upfront cost, used to judge refinancing and discount points.
Cash to close#: The total amount needed at closing: down payment plus closing costs, less any credits.
Closing costs#: Fees due at completion of the purchase, covering lender charges, title, appraisal, recording, transfer taxes and prepaid escrow items. Typically 2% to 5% of the purchase price.; Paid out of the same savings as the down payment. Budgeting for the down payment alone is the classic first-time-buyer mistake.; See alsoCash to close
Escrow#: An account the lender maintains to collect property taxes and insurance monthly and pay them when due.; Because taxes and insurance change, an escrow account is periodically re-analysed and the monthly payment adjusts. A fixed-rate mortgage payment is only fixed in its principal and interest portion.; See alsoPITI
Loan Estimate#: A standardised three-page disclosure a lender must provide within three business days of an application, setting out the rate, payment and closing costs.; Standardised specifically so quotes can be compared side by side. It is the binding document; any calculator, including this one, is an estimate.
Preapproval#: A lender's conditional commitment to lend a specified amount, based on verified income, assets and credit.
Prequalification#: An informal estimate of what a borrower might be able to borrow, based on unverified information.; Carries little weight with sellers. Preapproval, which involves verification, is the one that matters in a competitive offer.
Rate lock#: A lender's commitment to hold a quoted rate for a set period while the loan is processed.
Refinance#: Replacing an existing mortgage with a new one, usually to lower the rate, change the term, or take cash out.; Judge it on lifetime cost as well as on the monthly payment. Resetting a loan several years in to a fresh 30-year term can lower the payment while raising total interest.; See alsoBreak-even point
Title insurance#: Insurance against defects in the property's ownership history. The lender's policy is required; the owner's policy is usually optional but protects the buyer's own stake.
Underwriting#: The lender's assessment of whether to make the loan, verifying income, assets, credit and the property's value.

Put the numbers to work

Knowing what PITI stands for is a start; seeing yours is the point. The mortgage calculator breaks a payment into all four parts, the DTI calculator shows how a lender reads your income, and the PMI calculator works out when mortgage insurance stops.