Mortgages seem to have a language all their own.

To make your life easier, we’ve translated common mortgage terms into simple English. From ARMs to APRs, this quick guide will give you a better understanding of mortgage terminology – which, in turn, might help you get better terms when you apply for your mortgage. So keep this handy. And you’ll be speaking mortgage in no time.

Adjustable-Rate Mortgage (ARM)

A mortgage in which the interest rate – and payments – can vary after the introductory period. How frequently it varies depends on each individual mortgage.

Adjustable Date

The date that the interest rate changes on an adjustable-rate mortgage (ARM).

Amortization

The total loan payment, divided into equal periodic payments calculated to pay off the debt at the end of a fixed period (e.g., 15 or 30 years). Since this includes accrued interest on the outstanding balance, payments in the first years of the loan are mostly applied to interest; in the final years, mostly to principal.

Annual Percentage Rate (APR)

The APR is a measure of the cost of credit, expressed as a nominal, yearly rate. It relates the amount and timing of value received by the borrower to the amount and timing of payments made.

Appraisal

An estimate of the value of a property made by a qualified professional, called an appraiser, for the purpose of evaluating a property to extend home financing.

Assessment

A local tax levied against a property to fund specific projects, such as sewers or street lights.

Bridge Loan

A mortgage loan that enables borrowers to obtain financing for a new house before their present house is sold. The present home is used as collateral. Also known as a swing loan.

Caps (on Interest Rate)

A limit on how much the interest rate can change during a specified period of time.

Closing

When the property legally trades hands. Also called settlement, this is the meeting between the buyer, seller and lender or their agents, during which property is exchanged for funds and closing costs are paid.

Closing Costs

Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs vary by locality and the lenders used, and usually total about 3-6% of the mortgage amount.

Closing Disclosure

Per federal mandate, lenders must provide a Closing Disclosure document to loan applicants 3 business days before the scheduled closing date. This time allows the applicant to review the loan details.

Construction Loan

A short-term interim loan to pay for the construction of a new home. These loans are usually designed to provide periodic disbursements to the builder as they progress.

Conventional Loan

A mortgage not insured by FHA or guaranteed by VA.

Credit Risk Score

A credit risk score is a statistical summary or calculation of the information contained in the borrower’s credit report – much like a grade. The most well-known type is the Fair Isaac or FICO® Score. The credit risk score is very important to most mortgage lenders when considering a loan decision.

Down Payment

The difference between the purchase price and the mortgage amount, often expressed as a percentage. A 20% down payment on a $230,000 loan is $46,000.

Equal Credit Opportunity Act (ECOA)

A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity

Also referred to as the owner’s interest: the difference between the fair market value (what the property is worth) and current indebtedness (what is owed to the lender). This is the amount the owner would be left with after paying off any mortgages or liens, if the property was sold for market value.

Escrow

An account held by the lender into which the homebuyer pays money to cover tax or insurance payments. As an example, the homebuyer pays $120 to the lender every month over and above the mortgage payment; the lender holds that money in an escrow account, and every six months the lender pays out $600 from the account to the town for property taxes, and $120 to a homeowner’s insurance provider. Escrow can also refer to “earnest money” deposits requested by the seller and held by a bank before closing.

FHA

The Federal Housing Administration, which provides mortgage insurance on loans provided by FHA-approved lenders. FHA financing features lower down payments, low closing costs and no prepayment penalties.

First Mortgage

The primary lien against a property. If the property is sold, the first mortgage holder is paid before any other lien holder.

Fixed Installment

The monthly payment due on a mortgage loan, including both principal and interest.

Fixed-Rate Mortgage

A mortgage in which the interest rate and monthly principal payment remain the same, or are “fixed,” for the term of the loan.

Hazard Insurance

A published rate used by lenders that serves as the basis for determining interest rate changes on ARM loans. Some commonly used indices include the 1-Year Treasure Bill, 6-Month LIBOR, and the 11th District Cost of Funds (COFI).

Initial Interest Rate

In an adjustable-rate mortgage (ARM), this is the original – and typically lower-nterest rate – at the time of closing. Also known as the “start rate,” it usually changes after the first adjustment period.

Intent to Proceed

After applicants have reviewed their Loan Estimate (and if they agree with its terms), they’ll need to provide their “Intent to Proceed” to the lender. This communication can be either verbally or in writing.

Interest

The fee charged for borrowing money, usually expressed as a percentage.

Interest-Only Mortgage

A home loan features an initial period during which payments are applied only toward interest. After the initial period, monthly payments increase because they include an additional amount applied against the principal.

Jumbo Loan

A mortgage loan that exceeds the conforming loan amount. Jumbo loans usually command higher interest rates.

Lifetime Payment Cap

For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.

Loan

A sum of borrowed money (principal) that is generally repaid with interest.

Loan Estimate

The Loan Estimate (LE) is a federally mandated form provided to the applicant by the lender which outlines critical information about the mortgage loan, such as the estimated interest rate, monthly payment and total closing costs. The lender cannot collect any fees other than a credit report fee until the applicant has reviewed the LE and provided their Intent to Proceed. The LE is valid for 10 business days.

Maturity Date

The date on which the principal balance of a loan becomes due and payable. On a 30-year mortgage, this is 30 years from the closing date.

Mortgage

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Insurance Premium (MIP)

The upfront insurance premium you must pay if you get an FHA loan. The insurance helps cover the cost of reselling your home if you default on the loan.

Origination Charge

The fee charged by a lender to prepare the loan and sometimes appraise a property; usually computed as a percentage of the loan.

PITI

See Principal, Interest, Taxes, and Insurance.

Points (Loan Discount Points)

Prepaid interest assessed at closing by the lender. Each point is equal to 1% of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Principal Balance

The outstanding balance of principal on a mortgage, not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI)

The four components of a monthly mortgage payment (also referred to as the monthly housing expense). Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowner’s insurance, whether these amounts are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI)

When buying a home with less than a 20% down payment, borrowers are usually required to carry private mortgage insurance to protect the lender from the costs of a possible default. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.

Rate Lock

A lender’s guarantee that the mortgage rate quoted will be good for a specific number of days from the day of application.

Refinance

Obtaining a new mortgage loan on a property already owned, typically to replace one or more existing loans on the property.

RESPA

RESPA stands for the Real Estate Settlement Procedures Act. RESPA covers conventional mortgage loans on one- to four-family properties, as well as government-insured and guaranteed loans. RESPA sets forth certain requirements for loan servicing and escrow accounts. The statute further protects borrowers by prohibiting kickbacks and referral fees that could increase costs in the settlement process.

Second Mortgage

A mortgage made after another mortgage on the same property. The second mortgage is subordinate to the first; if the property is sold, the second mortgage holder is only paid after the first mortgage holder.

Servicer

An organization that collects principal and interest payments from borrowers and manages borrower escrow accounts. This is often different from the organization that originated or made the loan. Servicers may administer mortgages that have been purchased by an investor in the secondary mortgage market.

Servicing

All the steps and operations a lender (or servicer) performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance property inspections, etc.

Subprime

A class of mortgages offered to customers whose credit history is insufficient to qualify for a conventional loan. Subprime loans typically carry higher interest rates and may include prepayment penalties.

Title

A legal document that serves as evidence of property ownership.

Title Insurance

A policy, usually issued by a title insurance company, which insures a lender against errors in the title search. Policies are also available to protect the homebuyer’s interests.

Title Search

An examination of municipal records to determine the legal ownership of property, usually performed by a title company.

Truth-in-Lending Act

A federal law requiring disclosure of credit terms in a standard format including the Loan Estimate and Closing Disclosure. With these disclosures, you can better compare the lending terms of various financial institutions.

Underwriting

The decision of whether to make a loan to a potential homebuyer based on credit, employment, assets and other risk factors – and the matching of this risk to an appropriate rate, term or loan amount.

VA

The U.S. Department of Veterans Affairs, which guarantees home financing featuring little or no down payment, and other favorable terms for eligible veterans, reservists and surviving spouses. VA financing is available from selected lenders that use VA-approved appraisers.

Variable-Rate Mortgage (VRM)

See adjustable-rate mortgage.

Verification of Employment (VOE)

A document signed by the borrower’s employer verifying their position and salary.

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