22 key mortgage terms explained in plain English. Bookmark this page.
Annual Percentage Rate — the total yearly cost of borrowing including fees, expressed as a percentage. Always higher than the base rate.
The process of paying off a loan through regular payments over time. Early payments are mostly interest; later payments are mostly principal.
Professional assessment of a property's market value. Required by lenders to ensure the home is worth the loan amount. Typically costs $450-$600.
Fees paid at the end of a real estate transaction, typically 2-5% of the loan amount. Includes title insurance, appraisal, recording fees, and prepaid taxes.
A mortgage that meets Fannie Mae or Freddie Mac guidelines and falls within the conforming loan limit ($766,550 in 2026 for most areas).
A mortgage not insured by a government agency. Requires 5-20% down, 620+ credit. PMI drops at 20% equity.
Debt-to-Income ratio — your total monthly debts divided by gross monthly income. Most lenders want 43-50% or less.
The upfront cash you pay toward the home purchase. VA: 0%, FHA: 3.5%, Conventional: 5-20%.
The portion of your home you actually own — home value minus remaining loan balance. Equity grows as you pay down the loan and as the home appreciates.
An account held by a third party to collect and pay property taxes and insurance. Your monthly payment typically includes escrow contributions.
Government-insured mortgage through the Federal Housing Administration. 3.5% down, 580+ credit, permanent MIP. Popular for first-time buyers.
An interest rate that stays the same for the entire loan term. Most common: 30-year and 15-year fixed.
A mortgage exceeding conforming loan limits. Requires higher credit (700+), larger down payment (10-20%), and more reserves.
Loan-to-Value ratio — your loan amount divided by the home's appraised value. 80% LTV = 20% equity = no PMI on conventional.
Mortgage Insurance Premium — FHA's version of PMI. Includes 1.75% upfront and 0.55% annual. Required for the life of the loan on most FHA loans.
Private Mortgage Insurance — required on conventional loans with less than 20% down. Costs 0.3-1.5% of loan annually. Drops automatically at 22% equity.
A lender's written commitment to lend you a specific amount, based on verified income, assets, and credit. Valid 60-90 days.
The amount of money you borrow. Your monthly payment covers principal (pays down the loan) and interest (the lender's profit).
A guarantee from the lender that your interest rate won't change for a set period (typically 30-60 days). Protects you if rates rise before closing.
Replacing your existing mortgage with a new one, usually to get a lower rate, change the term, or access equity (cash-out refinance).
Protection against ownership disputes or defects in the property's title history. Required by lenders; optional owner's policy recommended.
Government-guaranteed mortgage for eligible veterans and active-duty military. $0 down, no PMI, lowest rates available.
