Glossary of Home Loan Terms
Mortgage terminology can be really confusing, and for first time homebuyers who are most likely overwhelmed and stressed, it can be almost too difficult to understand. Here are some of the mortgage terms that you are most likely to come across while getting ready to take out what’s likely to be your largest financial liability.
Common home loan terms
Adjustable rate mortgage (ARM)
A mortgage loan with regularly scheduled adjustments with interest rate and payments tied to changes to an index plus a margin. Adjustment features and terms vary from lender to lender, but it can be riskier than a fixed rate mortgage if rates ultimately go up.
Amortization
The process of paying off a loan through regular, equal payments over time, which include both principal and interest.
Appraisal
An evaluation of the property's value by a qualified appraiser to determine its market worth. An appraisal is usually required before any home sale.
Balloon mortgage
A balloon mortgage is a short-term home loan where regular payments are made for a specified period, and at the end of the term, a larger payment is made to pay off the loan.
Closing
The act of signing all home loan documents required to transfer title of a property and, if necessary, to establish the lien and create the mortgage and disburse the funds. Also referred to as settlement.
Closing costs
The fees paid at closing to various parties, to transfer the title of a property and, if necessary, to establish the lien and create the mortgage.
Discount point
A fee charged to increase the yield to an investor over and above the stated interest rate. A discount point generally lowers the interest rate. One point equals one percent of the loan amount.
Down payment
The initial payment made by the borrower, usually a percentage of the home's purchase price, paid upfront. Depending on the loan type and other circumstances, you may qualify for down payment assistance to help you finance your new home.
Escrow account
A specific trust account used in a home loan, in which funds are held for disbursement based upon the agreement between the parties to the agreement. Accounts may be for the handling of taxes, insurance, or for funds held to complete repairs, or for the disbursement at closing.
Equity
The portion of the property's value owned by the homeowner, calculated as the home's market value minus the outstanding loan balance.
Fixed rate mortgage
A mortgage with a constant interest rate throughout the entire term of the loan.
Home equity loan
A type of loan that allows homeowners to borrow against the equity in their property. You can also use your home's equity to access funds through a home equity line of credit (HELOC).
Homeowner's insurance policy
A policy whereby an insurer agrees to compensate the insured in the event of loss to the property and its contents due to multiple perils including wind damage, theft, and liability for personal or property claims.
Loan-to-value ratio
The ratio expressed as a percentage of the loan amount to the sales price or appraised value, whichever is less.
Lock-in
Most commonly used in referring to the guarantee issued by a lender for a specific period of time prior to closing a mortgage loan, guaranteeing the terms at which the home loan, if approved, will close.
Origination fee
The fee paid to a lender for originating the home loan, normally expressed as a percentage of the loan amount.
Preapproval
A preliminary approval from a lender based on a borrower's financial profile, indicating the amount they are eligible to borrow.
Prepayment penalty
A prepayment penalty is a provision of some mortgages that require consumers to pay a penalty when paying off a mortgage in advance.
Principal
The original amount of money borrowed for a home loan.
PITI
PITI is the abbreviation for principal, interest, taxes and insurance comprising a monthly mortgage payment.
Private mortgage insurance (PMI)
Private mortgage insurance is the insurance obtained on a conventional home loan to protect the lender in the event of default by a borrower.
Title insurance
Insurance that protects the homeowner and lender against financial loss due to defects in the property title.
