Mortgage Glossary

Plain-English definitions of the mortgage and home-buying terms you'll meet along the way.

Amortization

The process of paying off a loan through regular payments, where early payments are mostly interest and later payments are mostly principal. An amortization schedule lists each payment's split and the remaining balance.

APR (Annual Percentage Rate)

The yearly cost of a loan including the interest rate plus most fees, expressed as a percentage. APR is usually slightly higher than the note rate and is the best single number for comparing loan offers.

Principal

The amount you borrow, separate from interest. Each mortgage payment reduces the principal a little; paying extra principal shortens the loan and cuts total interest.

PMI (Private Mortgage Insurance)

Insurance that protects the lender when you put down less than 20% on a conventional loan. It's added to your monthly payment and cancels automatically once your balance reaches 78% of the home's original value.

MIP (Mortgage Insurance Premium)

The FHA equivalent of PMI: an upfront premium (1.75% of the loan) plus an annual premium. Unlike PMI, FHA MIP often lasts the life of the loan unless you put 10%+ down or refinance.

Escrow

An account your lender uses to collect and pay your property taxes and homeowners insurance on your behalf, spread across your monthly payment instead of paid in lump sums.

DTI (Debt-to-Income Ratio)

Your monthly debt payments divided by gross monthly income. Lenders typically want housing under 28% (front-end) and total debt under 43% (back-end) to approve a mortgage.

LTV (Loan-to-Value Ratio)

The loan amount divided by the home's value. A 20% down payment means an 80% LTV. LTV above 80% on a conventional loan triggers PMI.

Down payment

The cash you pay upfront toward the purchase price. A larger down payment lowers your loan, your payment, and — at 20% — removes PMI.

Closing costs

Fees paid to finalize a mortgage — lender, title, escrow, appraisal, and prepaid taxes/insurance — typically 2%–5% of the loan amount.

Points (discount points)

Optional upfront fees you pay to lower your interest rate. One point costs 1% of the loan and usually cuts the rate by about 0.25%. Worth it only if you keep the loan long enough to recoup the cost.

Fixed-rate mortgage

A loan whose interest rate never changes, so your principal-and-interest payment is the same for the entire term (commonly 15 or 30 years).

Adjustable-rate mortgage (ARM)

A loan with a lower fixed rate for an intro period (e.g. 5, 7, or 10 years), after which the rate adjusts periodically with the market — lowering early payments but adding later risk.

Conforming loan

A mortgage that meets the size limit set by the FHFA (about $806,500 in most areas for 2026) and can be sold to Fannie Mae or Freddie Mac, usually with the best rates and terms.

Jumbo loan

A mortgage larger than the conforming limit. Jumbo loans finance higher-priced homes and typically require stronger credit, a larger down payment, and cash reserves.

Pre-approval

A lender's conditional commitment to lend you up to a specific amount, based on a review of your finances. It turns an affordability estimate into a number you can shop and make offers with.

Refinance

Replacing your current mortgage with a new one — usually to get a lower rate, change the term, or remove PMI. Worth it when you'll stay past the breakeven point on closing costs.

Breakeven point

In a refinance, the month when your accumulated monthly savings equal the closing costs you paid. Stay in the home past that point and the refinance saves money.