Mortgages are a cornerstone of financial life. Understanding the terminology is key whether you’re a homeowner, renter, or industry professional. This glossary provides clear, in-depth definitions of the most common mortgage terms. Let’s dive in!
💼 Loan Types and Features
5/1 Adjustable Rate Mortgage (ARM)
A 5/1 ARM is a mortgage loan where “5” is the number of years your interest rate stays fixed. The “1” means the interest rate adjusts annually after those five years. These loans often start with lower interest rates than fixed-rate loans but may increase substantially later. Carefully read the contract and ask questions if you’re considering one.
Adjustable Rate Mortgage (ARM)
An ARM is a loan where the interest rate can change, usually based on an index interest rate. Your payment may start low but can rise significantly after the introductory period, depending on caps and index movements.
Balloon Loan
A balloon loan requires a large one-time payment—called a “balloon payment”—at the end of the term. This payment is often much higher than the previous monthly payments. If you can’t afford the balloon payment, you may need to refinance, sell your home, or risk foreclosure.
Conventional Loan
A conventional loan is not insured or guaranteed by the government (unlike FHA, VA, or USDA loans). It typically requires higher credit scores and down payments.
FHA Loan
FHA loans are issued by private lenders but insured by the Federal Housing Administration. They allow for lower credit scores and down payments (as low as 3.5%), with loan limits that vary by county.
FHA Funding Fee
This is the upfront mortgage insurance premium (UFMIP) required for most FHA loans, in addition to monthly premiums.
USDA Loan
Offered by the Rural Housing Service of the U.S. Department of Agriculture, these loans typically have no down payment and favorable terms for eligible rural homebuyers.
VA Loan
Available to eligible veterans, active-duty service members, and surviving spouses. VA loans are guaranteed by the Department of Veterans Affairs but issued by private lenders.
📄 Costs and Fees
Appraisal Fee
The appraisal fee covers the cost of a professional evaluation of the property’s value. Most lenders select the appraiser and pass this cost on to the borrower.
Amount Financed
This is the loan amount minus most upfront fees. It’s part of the total amount disclosed under federal truth-in-lending laws.
Closing Disclosure
This five-page document includes the final details of your mortgage: loan terms, projected payments, and closing costs. Always review it thoroughly before signing.
Origination Fee
A charge by the lender for making the mortgage loan. It can include processing, underwriting, and funding costs.
Finance Charge
This is the total interest and loan charges you’ll pay over the life of the loan.
🏡 Home Costs and Ownership
Down Payment
An upfront portion of the home’s price you pay out-of-pocket. Typically, a larger down payment results in better interest rates and eliminates the need for mortgage insurance.
Equity
Equity is the current market value of your home minus the remaining mortgage balance.
Escrow
An escrow account is managed by your lender and used to pay property-related costs like taxes and insurance. A portion of your mortgage payment is deposited monthly.
Home Purchase Price
This is the agreed-upon price between buyer and seller—not always the same as appraised value.
Property Taxes
Local government taxes based on property value. Often collected by your lender in escrow and paid on your behalf.
💳 Credit and Income
Annual Income
Your total earned pre-tax income in a year, including wages, tips, bonuses, or self-employment. Lenders evaluate this to determine your ability to repay.
Credit History
Your credit history includes your account records and payment history. Lenders use it to assess risk.
Credit Report
A document showing your credit history, loan accounts, inquiries, and public records. You can request copies from major credit bureaus.
Credit Score
A numerical representation of your creditworthiness. It’s calculated based on your credit report and used by lenders to make lending decisions.
📊 Loan Terms and Limits
Interest Rate
The percentage charged annually on the loan’s unpaid principal. This doesn’t include fees or APR.
Annual Percentage Rate (APR)
A broader measure than the interest rate, it includes fees like points and broker costs. It’s usually higher than the base interest rate.
Loan Term
The total number of years to repay your mortgage—commonly 15, 20, or 30 years.
Loan-to-Value Ratio (LTV)
A ratio comparing the loan amount to the home’s appraised value. A higher LTV may require mortgage insurance.
⚠️ Risk Management
Forbearance
A temporary pause or reduction in payments, granted by your lender due to hardship such as job loss or illness. You must repay missed payments later.
Loan Modification
A permanent change to your loan terms (e.g., extending term or reducing rate) to make payments more manageable.
Delinquent
A loan becomes delinquent when payments are missed or incomplete. Long-term delinquency can lead to foreclosure.
Foreclosure
When a lender legally takes back a property due to missed payments. State and federal rules govern the timeline and notification process.
🧾 Insurance Types
Homeowner’s Insurance
Covers losses and damage to your home. Required by lenders to protect the property.
Mortgage Insurance
Protects the lender if you default. Required for FHA, USDA, and conventional loans with less than 20% down:
- PMI (Private Mortgage Insurance): For conventional loans.
- MIP (Mortgage Insurance Premium): For FHA loans.
Lender’s Title Insurance
Protects the lender against title issues. To protect yourself, purchase owner’s title insurance separately.
With these definitions in hand, you’re equipped to navigate any mortgage discussion – whether evaluating options, advising clients, or planning future moves. Bookmark this glossary as your go-to reference and transform mortgage jargon into straightforward knowledge.