Glossary of Mortgage Terms

Here is a quick guide to common terms to help you navigate the home buying and mortgage application process.

Adjustable rate mortgage (ARM)

A mortgage with a variable interest rate that adjusts periodically based on a preselected index and a margin, causing interest rates and monthly payments to periodically adjust.


A monthly repayment schedule in which a loan is repaid through payments of principal and interest.

Annual percentage rate (APR)

The annual cost of a loan, expressed as a yearly rate. APR takes into account interest, discount points, lender fees and mortgage insurance, so it will be slightly higher than the interest rate on the loan.


A written estimate of a property’s current market value, based on recent sales information of similar properties, and the current condition of the property.

Assessed valuation

Determines the value of a residence for tax purposes and takes comparable home sales and inspections into consideration.


Limits on changes in ARM interest rates or monthly payments, either in an adjustment period or over the life of the loan.


Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.

Closing costs

Fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during a mortgage loan closing. These typically include a loan origination fee, discount points, attorney’s fees, title insurance, appraisal, survey and any items that must be prepaid, such as taxes and insurance escrow payments.

Closing disclosure

The computation of costs payable at closing that determines the seller’s net proceeds and the buyer’s net payment.


Assets that back a mortgage loan.

Consumer Financial Protection Bureau

A federal agency that enforces laws that protect consumers of financial products and services such as mortgages, credit cards and deposit accounts.

Discount points

Money paid to a lender at closing in exchange for lower interest rates. Each point is equal to 1 percent of the loan amount.

Down payment

Money paid for a house from one’s own funds at closing. The down payment will be the difference between the purchase price and mortgage amount.

Escrow account

Account held by a lender containing funds collected as part of mortgage payments for annual expenses such as taxes and insurance, so that the homeowner does not have to pay a large sum when these fall due.

Fannie Mae (federal national mortgage association)

A quasi government agency created by Congress that buys and sells residential loans.

Fixed rate mortgage

A mortgage with an interest rate that doesn’t change for the life of the loan, guaranteeing fixed payments.

Freddie Mac (Federal Home Loan Mortgage Corporation)

Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Gift letter

A letter provided to a lender or government agency stating that money to be used as the down payment for a home loan was a gift and not a loan from the donor.

Hazard insurance

Protects the insured against loss due to fire or other natural disaster in exchange for a premium paid to the insurer.

Homestead exemption

Portion of a home’s assessed value that is exempt from property taxes.


A published rate used by lenders to calculate interest adjustments on ARMs (Index + Margin = Interest Rate). Some indexes are more volatile than others.

Loan estimate

This document sets out the costs associated with a mortgage, including the interest rate, lender fees, title charges, re-paid interest and insurance. The government requires that your lender give you a Loan Estimate within three days of receiving your loan application.

Loan-to-value ratio

The percentage of the property value borrowed.


The number of percentage points added to an index to calculate the interest rate on an ARM at each adjustment.

Market value

The highest price that a buyer may pay for a property and the lowest price a seller may accept.


A document that creates a lien on a property as security for the payment of a debt.

Mortgage Insurance (MI)

An insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.


An evaluation of a potential borrower by a lender that determines whether the borrower qualifies for a loan from the lender.


The process of determining how much money a prospective homebuyer may borrow, prior to application for a loan.

Rate lock

Guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific time period.


The process of paying off one loan with the proceeds from a new loan secured by the same property.

Secondary market

The market into which primary mortgage lenders sell the mortgages they make to obtain funds to originate more loans.


The collection of mortgage payments from borrowers and related responsibilities.

Title insurance

Insurance that protects the lender (lender’s policy) or buyer (owner’s policy) against loss due to disputes over property ownership.

Transfer tax

Tax paid when a title passes from one owner to another.


The process of verifying data and evaluating a loan application. The underwriter gives the final loan approval.

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