Amortization
The process of gradually repaying a mortgage loan through regular, scheduled payments. Each payment covers interest and principal, reducing the loan balance over time.
Annual Percentage Rate (APR)
The total annual cost of a mortgage, expressed as a percentage. It includes the interest rate plus other fees, giving a clearer picture of the loan's overall cost.
Appraisal
A professional evaluation of a property’s market value, conducted by a licensed appraiser. Lenders require this to ensure the property is worth the loan amount.
Bridge Loan
A short-term loan used to bridge the gap between buying a new property and selling an existing one. It’s commonly used when immediate funds are needed for a down payment.
Closing Costs
Fees and expenses required to finalize a mortgage transaction. These include legal fees, title insurance, appraisal fees, and taxes, typically paid at closing.
Collateral
The property or asset pledged as security for a mortgage loan. If the borrower defaults, the lender can take ownership of the collateral to recover the loan.
Credit Score
A numerical representation of a borrower’s creditworthiness, based on their credit history. Higher scores result in better loan terms and lower interest rates.
Debt-to-Income Ratio (DTI)
The percentage of a borrower’s gross monthly income used to pay debt. Lenders use this to assess the borrower’s ability to manage monthly payments.
Down Payment
The upfront payment made by a borrower toward the purchase of a home. It’s typically expressed as a percentage of the home’s price.
Escrow
A third-party account used to hold funds or documents until all conditions of the sale or loan are met, such as property taxes and insurance.
Equity
The difference between the current market value of a property and the remaining mortgage balance. It represents the homeowner’s financial stake in the property.
Fixed-Rate Mortgage
A loan with an interest rate that remains constant for the entire term of the loan, ensuring consistent monthly payments.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that can change periodically, typically after an initial fixed-rate period, based on market conditions.
Foreclosure
The legal process through which a lender takes ownership of a property after the borrower fails to meet their mortgage obligations.
Loan-to-Value Ratio (LTV)
The percentage of a property’s value financed by a mortgage. A higher LTV represents greater risk to the lender.
Mortgage Insurance
A policy that protects the lender in case the borrower defaults on the loan. It’s often required for loans with an LTV above 80%.
Prepayment Penalty
A fee charged by some lenders if the borrower pays off the loan early. It compensates the lender for lost interest revenue.
Pre-Approval
A lender’s conditional commitment to lend a specific amount to a borrower, based on an initial assessment of their financial situation.
Principal
The original loan amount borrowed, excluding interest. Mortgage payments gradually reduce the principal balance over time.
Interest
The cost of borrowing money, calculated as a percentage of the principal balance. It’s typically paid monthly as part of the mortgage payment.
Refinancing
The process of replacing an existing mortgage with a new one, often to secure a lower interest rate, reduce monthly payments, or change loan terms.
Title
The legal documentation proving ownership of a property. It also details any claims or liens on the property.
Underwriting
The process lenders use to assess the risk of providing a mortgage. It includes evaluating the borrower’s credit, income, and the property’s value.
Title Insurance
A policy that protects homeowners and lenders against financial loss due to title defects, liens, or disputes over ownership.
Origination Fee
A fee charged by lenders to process a mortgage application, often expressed as a percentage of the loan amount.
Fixed-Period ARM
A type of adjustable-rate mortgage with a fixed interest rate for an initial period (e.g., 5 or 7 years) before adjusting periodically.
Points (Discount Points)
Optional fees paid upfront to lower the mortgage’s interest rate. Each point equals 1% of the loan amount.
Balloon Payment
A large, lump-sum payment due at the end of a mortgage term, often associated with shorter-term loans with lower initial monthly payments.
Private Mortgage Insurance (PMI)
Insurance required for conventional loans with less than a 20% down payment. It protects the lender if the borrower defaults.
Reverse Mortgage
A loan available to homeowners aged 62 or older that allows them to convert home equity into cash, with no repayment required until the home is sold or the owner passes away.