The ultimate glossary to understanding the mortgage process.
Buying a home can feel overwhelming, especially with the array of unfamiliar terms and jargon. To help you navigate the process with confidence, we’ve compiled this glossary of commonly used mortgage terms. Understanding these will empower you to make informed decisions as you move forward. For a more comprehensive list, download the full glossary PDF at the end of this article.
Key Mortgage Terms
Amortization
The gradual reduction of your loan's principal balance over time. Early payments primarily cover interest, while later payments focus more on the principal.
Break-Even Point
The point at which your total savings equal the costs of refinancing or purchasing discount points. For example, if paying $3,600 in discount points reduces your monthly payment by $100, it will take 36 months to break even.
Cash-Out Refinance
A refinancing option where the new loan exceeds the balance of your current mortgage. The extra amount, given to you in cash, can be used for debt consolidation, home improvements, or other expenses.
Closing Disclosure (CD)
A detailed document outlining your loan terms, including interest rate, monthly payments, and closing costs. You’ll receive this at least three business days before closing.
Debt-to-Income Ratio (DTI)
A percentage that compares your monthly debt payments to your gross monthly income. For example, a DTI of 43% means your monthly debt obligations consume 43% of your income.
Down Payment
The cash you contribute upfront toward purchasing a home, typically ranging from 5% to 20% of the sales price.
Escrow Account
A secure account set up by your lender to manage funds for property taxes and homeowners insurance. Your monthly mortgage payment often includes contributions to this account to prevent large lump-sum payments. This is optional in most cases.
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by your home, often used for home improvements, debt consolidation, or major expenses. A HELOC typically includes a 10-year draw period and a 20-year repayment period.
Jumbo Loan
A loan amount that exceeds conforming limits set by Fannie Mae and Freddie Mac. These loans often have stricter requirements and may come with higher fees.
Loan-to-Value Ratio (LTV)
The ratio of your loan amount to the appraised value of your home. For example, an $80,000 loan on a $100,000 property equals an LTV of 80%.
Mortgage Insurance
Required for conventional loans when your down payment is less than 20%. It protects the lender in case of default.
Points
Fees paid at closing to lower your interest rate (buying points) or reduce closing costs (negative points). One point equals 1% of the loan amount.
Prequalification
An initial assessment of how much you may be able to borrow based on basic financial information. It’s not a guarantee of loan approval.
Principal & Interest
The principal is the loan amount you borrow, while interest is the cost of borrowing. Together, they form the majority of your monthly mortgage payment.
Rate Lock
A lender’s guarantee of a specific interest rate for a set period, protecting you from market fluctuations. If your rate lock expires, you’ll need to request a new one before closing.
Underwriting
The lender’s process of evaluating your credit, employment, assets, and other factors to determine your loan’s risk and terms.
Partnering for Your Success
Understanding these key terms is just one step in demystifying the mortgage process. My team and I are here to guide you every step of the way, ensuring clarity and confidence as you move toward your homeownership goals.
If you have any questions, feel free to give us a call. We’re always happy to help!
