Mortgage Glossary: Key Terms Explained

Amortization is the process of spreading a loan into equal monthly payments over time. Each payment covers both interest and a portion of the principal balance.

The annual percentage rate is the total yearly cost of borrowing, including interest and fees, expressed as a percentage. APR gives you a more complete picture of loan cost than the interest rate alone.

An adjustable-rate mortgage has an interest rate that changes periodically based on a market index. ARMs typically start with a lower fixed rate for an introductory period, then adjust up or down.

Closing costs are the fees and expenses you pay when finalizing a mortgage, typically ranging from 2% to 5% of the loan amount. They include lender fees, appraisal costs, title insurance, and government recording charges.

A conventional loan is a mortgage that is not backed by a government agency like the FHA, VA, or USDA. Conventional loans typically require higher credit scores and larger down payments but offer competitive rates.

A credit score is a three-digit number (typically 300 to 850) that represents your creditworthiness. Lenders use it to determine your mortgage eligibility and the interest rate you qualify for.

Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments. Lenders use DTI to assess whether you can afford a new mortgage or refinance.

Equity is the difference between your home's current market value and the amount you still owe on your mortgage. It represents the portion of the home you truly own.

Escrow is an account managed by your mortgage servicer that holds funds for property taxes and homeowners insurance. A portion of each monthly payment goes into escrow so these bills are paid on time.

An FHA loan is a mortgage insured by the Federal Housing Administration. It allows lower credit scores and smaller down payments than conventional loans, making homeownership more accessible.

A fixed-rate mortgage has an interest rate that stays the same for the entire loan term. Your principal and interest payment never changes, making it easier to budget.

A jumbo loan is a mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). In 2026, loans above $806,500 in most areas are considered jumbo.

The loan-to-value ratio is the percentage of your home's appraised value that is financed by the mortgage. LTV is calculated by dividing your loan amount by the home's value.

Mortgage points (also called discount points) are upfront fees you pay to the lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount.

Private mortgage insurance is a monthly premium that protects the lender if you default on your loan. PMI is typically required on conventional mortgages when your down payment is less than 20%.

A prepayment penalty is a fee that some lenders charge if you pay off your mortgage early, either through refinancing or making extra payments. Most modern conventional loans do not include prepayment penalties.

Principal is the original amount of money you borrowed for your mortgage, or the remaining balance you still owe. Each monthly payment reduces the principal by a small amount.

A rate lock is a lender's guarantee that they will hold a specific interest rate for you for a set period, usually 30 to 60 days. It protects you from rate increases while your loan is being processed.

Refinancing means replacing your current mortgage with a new loan, typically to get a lower interest rate, change the loan term, or access your home equity through a cash-out refinance.

A VA loan is a mortgage backed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. VA loans require no down payment and no private mortgage insurance.