First Time Home Buyer

The Top 20 Most Confusing Mortgage Terms Defined

The definitions you need to know most and the role they play in the mortgage process

Girl looking at phone

From “APR” to “Balloon”, mortgage acronyms and terms can be confusing. Below you will find the 20 most common mortgage terms you may come across, what they mean, and the role they play in the mortgage process.

  1. ARM (Adjustable Rate Mortgage): A mortgage in which the interest rate is adjusted up or down periodically based on a pre-selected index; also known as a re-negotiable rate mortgage or a variable rate mortgage. ARM products have interest rates that may increase after loan consummation.
  2. Amortization: Repayment of debt with periodic payments of both principal and interest, calculated to pay off the loan obligation at the end of a fixed period of time.
  3. APR (Annual Percentage Rate): The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act and Regulation Z. Because it includes certain costs paid to obtain the loan, it is usually higher than the interest rate stated in the mortgage note. Aids in comparing the true cost of loans offered by lenders.
  4. Balloon: A loan with monthly payments not sufficient to pay off entire loan debt, followed by a single, usually much larger, “balloon” or lump-sum payment at the end of the loan term to pay off the remaining principal balance.
  5. Buy-down: An interest rate subsidy in the form of additional discount points paid by a builder, seller, lender, or buyer which results in either a permanent or temporary below-market interest rate. A temporary buydown typically lowers the interest rate during the first few months or years of the loan, resulting in lower initial monthly mortgage payments that will increase when the subsidy expires. A permanent buydown lowers the interest rate for the life of the loan.
  6. DTI (Debt-to-income ratio): The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income.
  7. Discount points: A one-time charge imposed by the lender to lower the interest rate at which the lender would otherwise offer the loan. Each point is equal to one percent (1%) of the mortgage amount.
  8. Escrow: Money collected by a lender as a part of the monthly mortgage payment and used for the purpose of paying a homeowner’s real estate taxes and insurance obligations.  In some areas this may also be called "impounds."
  9. Flood certification: A process in which the location of a property is examined to determine whether it falls within an area that is at special risk for flooding as determined by the Federal Emergency Management Agency.
  10. Loan Estimate: Summarizes the terms of your loan and estimated costs. It will be issued within three business days after your loan application. Processing of your loan starts when you submit the Intent to Proceed form that is issued along with the Loan Estimate.
  11. Hazard insurance: An insurance policy insuring against multiple perils, commonly called a package policy, and made available to owners of private dwellings. There are wide variations in the coverage of such policies, which generally insure the dwelling and its contents.
  12. Closing Disclosure: Provides the actual costs and terms of your loan. You will receive it at least three business days before closing.
  13. LTV (Loan to value ratio): The ratio, expressed as a percentage, which results from dividing the amount being borrowed by the appraised value or selling price of the house.
  14. Lock: A commitment obtained from a lender assuring a particular interest rate or feature for a definite time period. Protects borrower from interest rate increases between the time of loan application and loan closing.
  15. Origination fees: The lender's fee charged to a borrower to cover processing, administration and loan document preparation. The fee is usually a percentage of the loan amount.
  16. PITI (Principal, Interest, Taxes & Insurance): Principal, interest, real estate taxes, homeowner's hazard insurance, and, if applicable, private mortgage insurance and/or flood insurance. Also called monthly housing expense.
  17. PMI (Private Mortgage insurance): An insurance policy that allows a mortgage lender to recover part of its financial losses if a borrower defaults on a loan.
  18. RESPA (Real Estate Settlement Procedures Act): A federal statute governing real estate lending fee practices and disclosures. Its main features pertain to the distributions of a good faith estimate of loan settlement costs and the HUD settlement booklet within three business days of making a loan application.
  19. TILA (Truth in Lending Act): A federal statute that requires the disclosure of the Annual Percentage Rate and other information to home buyers shortly after they apply for a loan. The actual disclosure form is sometimes referred to as the TIL.
  20. Underwriting: The decision whether to make a loan to a potential home buyer based on credit, employment, assets and other factors, and the matching of risk to an appropriate rate and term or loan amount.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.