Mortgage Glossary of Terms
Buying a home can feel like learning a whole new language — LTV, escrow, PMI … what does it all mean? Don’t worry, we’ve got you covered. This glossary breaks down the most common mortgage terms in plain English, so you can feel more confident during your home-buying journey. Whether you're just starting to explore or already deep in the process, this list is here to help make things a little less confusing.
Adjustable-Rate Mortgage (ARM)
A home loan with an interest rate that can change over time. It usually starts with a lower fixed rate for a few years, then adjusts periodically based on market rates, which means your monthly payment can go up or down.
The process of gradually paying off a loan through regular monthly payments, which include both principal and interest.
The total cost of borrowing money over a year, including the interest rate and certain fees.
An expert’s estimate of a home’s market value, based on factors like location, condition, and recent sales of similar homes.
A new mortgage that replaces your current loan with a higher amount, letting you take the difference in cash.
The final step in buying a home where you sign documents, pay closing costs, and officially take ownership.
The fees and expenses you pay when finalizing a home purchase. These can include loan fees, title insurance, appraisal, and other services, and are typically paid at the closing meeting.
Collateral is something valuable that a borrower promises to give a lender if they can’t repay a loan. In the case of a mortgage, the collateral is the house you’re buying.
A detailed record of your borrowing history, including loans, credit cards, and payment habits. Lenders use it to assess how likely you are to repay a mortgage.
A number based on your credit history that shows how likely you are to repay borrowed money. Lenders use your credit score to decide how risky it is to lend you money. The higher your score, the more trustworthy you appear to lenders.
DTI is a percentage that compares how much you owe each month to how much you earn. It’s calculated by adding up all your monthly debt payments — like credit cards, car loans, student loans, and the estimated mortgage — and dividing that total by your gross (before-tax) monthly income. Your DTI helps a lender understand how much of your income is already going toward debt. A lower DTI means you have more room in your budget to take on a new loan, like a mortgage.
A legal document used in some states instead of a mortgage. It involves three parties—the borrower, the lender, and a trustee—and gives the trustee the right to hold the property title until the loan is paid off.
The amount you pay out of pocket on an insurance claim before your coverage kicks in. A higher deductible usually means a lower monthly premium, and vice versa.
The amount of money you pay upfront toward the purchase of a home. It reduces the total amount you need to borrow with a mortgage.
The difference between what your home is worth and what you still owe on your mortgage. As you pay down your loan or your home value increases, your equity grows.
A separate account your mortgage lender uses to collect and pay your property taxes and homeowners insurance on your behalf. Each month, a portion of your mortgage payment goes into this escrow account. Then, when your property taxes or insurance premiums are due, your lender uses the funds from escrow to pay them for you — so you don’t have to worry about making those large lump-sum payments yourself.
A separate policy that covers damage to your home and belongings caused by flooding. It’s not included in standard homeowners insurance and may be required if you live in a high-risk flood area.
A home loan with an interest rate that stays the same for the entire term of the loan. This means your monthly payment for principal and interest will never change.
Home Equity Line of Credit (HELOC)
A loan that lets you borrow against the equity in your home. You can take out money as needed, up to a set limit, and repay it over time.
A type of insurance that protects your home and belongings from damage or loss due to events like fire, theft, or storms. It also provides coverage if someone is injured on your property.
A professional examination of a home’s condition, usually done before purchase. It checks for issues like structural damage, plumbing problems, or safety concerns, helping buyers make informed decisions.
The money a lender charges you for using their funds to buy a home. It’s part of your monthly mortgage payment and is paid in addition to the amount you borrowed.
An agreement where the Credit Union and a member agree to change the interest rate of an existing mortgage loan. Upon entering into such an agreement, the Credit Union recalculates the monthly payment necessary to fully amortize (pay off) the remaining balance of the loan over the remaining loan term at the new interest rate.
A home loan that’s greater than $806,500. Because of the higher loan amount, it usually has stricter credit and income requirements.
A document that outlines the estimated costs of a mortgage loan, including fees and closing costs. It helps you understand what to expect and to compare offers from different lenders. A loan estimate should not be used as a final quote but rather a guideline to use for decision making.
A ratio that compares the amount of your loan to the value of the home. Lenders use it to measure risk — higher LTVs may mean more requirements, like mortgage insurance.
A loan used to buy a home, where the property serves as collateral. You agree to repay the loan over time, typically in monthly payments, until it’s fully paid off.
A fee paid in exchange for a lower interest rate. One point typically lowers your rate by 0.25%, costs 1% of your loan amount and is added to your fees paid at closing.
A lender’s written estimate of how much you can borrow, based on a review of your finances. It shows sellers you’re a serious buyer.
The amount of money you borrow to buy a home, not including interest. As you make payments, part goes toward reducing the principal, and part goes toward interest.
Private Mortgage Insurance (PMI)
A type of insurance that protects the lender if you stop making payments on your loan. It’s usually required if your down payment is less than 20% of the home’s price.
A tax paid by homeowners based on the value of their property. It’s usually collected by local governments to fund services like schools, roads, and emergency services.
A guarantee from your lender that your mortgage interest rate won’t change for a set period while you finalize your loan. This protects you from rising rates during the home-buying process.
The process of replacing your current mortgage with a new one, usually to get a lower interest rate, change the loan term, or switch loan types.
The legal right to own and use a property. It shows who officially owns the home and includes details about past ownership and any claims or restrictions on the property.
A business that handles the legal side of transferring property ownership. They research the property’s history to make sure there are no legal issues, provide title insurance, and often manage the closing process.
The process lenders use to review your financial information — like income, credit, and debt — to decide if you qualify for a mortgage and how much they’re willing to lend.
