Mortgage Glossary

A

Adjustable-rate mortgage (ARM)

A loan whose rate is fixed for an initial period, then adjusts on a schedule based on an index plus a margin.

Amortization

Paying off a loan with regular payments that cover interest and gradually reduce the balance.

Annual percentage rate (APR)

The yearly cost of a loan including interest and certain fees, shown as a percentage so offers can be compared.

Appraisal

A licensed appraiser's estimate of a home's market value.

Automated valuation (AVM)

A computer-generated home value estimate some lenders use instead of a full appraisal.

B

Bank statement loan

A non-QM loan that qualifies income from 12 or 24 months of bank deposits instead of tax returns.

Break-even point

How many months it takes for a refinance's savings to cover its costs.

Bridge loan

Short-term financing used to buy a new home or property before the current one sells.

C

Cash-out refinance

Replacing your mortgage with a larger one and receiving the difference in cash.

Closing costs

Fees paid to close a loan, such as lender, title, escrow, appraisal and recording fees.

Closing Disclosure

The final form showing your loan terms and costs, delivered at least three business days before closing.

Combined loan-to-value (CLTV)

All loans on a property added together, divided by its value.

Conforming loan

A conventional loan within the yearly FHFA loan limit that meets national guidelines.

D

Debt-to-income ratio (DTI)

Monthly debt payments divided by gross monthly income.

Debt service coverage ratio (DSCR)

A rental's monthly rent divided by its monthly payment; used to qualify DSCR loans.

Discount points

Upfront fees paid to lower the interest rate; one point equals 1% of the loan amount.

Down payment

The part of the purchase price you pay up front.

Draw period

The time you can borrow from a HELOC, often with interest-only payments.

E

Earnest money

A deposit made with a purchase offer to show good faith.

Equity

Your home's value minus what you owe on it.

Escrow

An account or neutral party that holds funds for taxes, insurance or a closing.

F

FHA loan

A mortgage insured by the Federal Housing Administration with flexible credit rules.

Funding fee (VA)

A one-time VA charge that can be financed; some veterans are exempt.

H

HECM

Home Equity Conversion Mortgage, the FHA-insured reverse mortgage.

HELOC

Home equity line of credit, a revolving credit line secured by your home.

Home equity investment (HEI)

Cash today in exchange for a share of your home's future value; not a loan.

Home equity loan (HELOAN)

A fixed-rate lump-sum second mortgage, also called a closed-end second.

I

Interest-only

A payment that covers interest but not principal for a set period.

IRRRL

VA Interest Rate Reduction Refinance Loan, a streamlined VA-to-VA refinance.

J

Jumbo loan

A loan above the conforming loan limit.

L

Lien

A legal claim on property that secures a debt.

Loan-to-value (LTV)

The loan amount divided by the home's value.

Loan Estimate

A standard form showing your estimated rate, payment and closing costs, given within three business days of applying.

M

Mortgage insurance (PMI / MIP)

Insurance protecting the lender; PMI on conventional loans, MIP on FHA loans.

N

NMLS

Nationwide Multistate Licensing System, where you can verify a loan originator's license.

Non-QM

A loan outside qualified-mortgage rules, often using alternative income documentation.

P

Pre-approval

A lender's conditional commitment based on a review of your credit, income and assets.

Prepayment penalty

A fee for paying off a loan early, more common on investment-property loans.

Prime rate

A benchmark rate banks use; most HELOC rates are based on it.

Principal

The amount you borrowed, not counting interest.

R

Rate-and-term refinance

A refinance that changes the rate or term without taking significant cash out.

Rate lock

A lender's commitment to hold a rate for a set period.

Reserves

Savings left after closing, often measured in months of payments.

Reverse mortgage

A loan for older homeowners with no monthly mortgage payment, repaid when they leave the home.

Right of rescission

Three business days to cancel certain refinances and HELOCs on a primary home after signing.

S

Seasoning

How long you've owned a property or how long since a credit event.

Second mortgage

A loan behind the first mortgage, such as a HELOC or home equity loan.

Streamline refinance

A simplified FHA or VA refinance with lighter documentation.

T

Title insurance

Insurance protecting against problems with a property's ownership history.

U

Underwriting

The lender's review of your file to approve the loan.