Mortgage Terms Explained: A Clear Glossary for Homebuyers

Why a Mortgage Glossary Matters

Buying a home involves a unique vocabulary that can be confusing. Terms like APR, escrow, amortization, and PMI are common, but their exact meanings can be unclear. This glossary provides clear, plain-language definitions to help you navigate the mortgage process with confidence.

Each term is defined based on authoritative sources, including the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve Board. Use this as a reference whenever you encounter unfamiliar jargon in other guides or during your home-buying journey.

Sources: Consumer Financial Protection Bureau, Federal Reserve Board

Key Mortgage Components

Understanding the basic parts of a mortgage is essential. The principal is the amount you borrow, and interest is the cost of borrowing that money. A down payment is what you pay upfront, and equity is the value you build in your home over time.

• Principal: The amount of money borrowed or the amount still owed on a loan.
• Interest: The cost of borrowing money, usually expressed as a percentage of the principal.
• Down payment: The amount you pay toward the home upfront, with the rest borrowed through the mortgage loan.
• Equity: The amount your property is currently worth minus the amount of any existing mortgage on your property.
• Escrow account: An account set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner's insurance.

Sources: Consumer Financial Protection Bureau, Federal Reserve Board

Loan Types

There are several types of mortgage loans, each with different features. A conventional loan is not insured or guaranteed by the government, while government-backed loans (such as FHA, VA, or USDA) are. Your choice of loan type affects your payments, interest rates, and eligibility requirements.

• Conventional loan: Any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs).
• Adjustable-rate mortgage (ARM): A type of loan for which the interest rate can change, usually in relation to an index interest rate.
• 5/1 ARM: A 5/1 adjustable-rate mortgage has an initial fixed rate for 5 years, after which the rate adjusts every 1 year.
• Interest-only mortgage: A loan with scheduled payments that require you to pay only the interest for a specified amount of time.
• Balloon loan: A loan that has a larger-than-usual, one-time payment, typically at the end of the loan term.

Sources: Consumer Financial Protection Bureau, Federal Reserve Board

Process and Payment Terms

The mortgage process involves several steps, from application to closing. Understanding these terms can help you prepare for each stage.

• Amortization: Paying off a loan with regular payments over time, so that the amount you owe decreases with each payment.
• Closing costs: Fees paid when you close (or settle) on a loan, including application fees, title examination, title insurance, property survey fees, attorneys' fees, recording fees, and other charges.
• Delinquent: Another term for being late on your payments.
• Earnest money: A deposit a buyer pays to show good faith on a signed contract agreement to buy a home.

Sources: Consumer Financial Protection Bureau, Federal Reserve Board

Interest Rates and Fees

Interest rates and fees affect the total cost of your mortgage. The interest rate is the cost of borrowing, while the annual percentage rate (APR) includes the interest rate plus other charges paid to get the loan.

• APR: A broader measure of the cost of borrowing money than the interest rate, reflecting the interest rate, points, mortgage broker fees, and other charges paid to get the loan.
• Points: Fees paid to the lender for the loan; one point equals 1 percent of the loan amount.
• Prepayment penalty: Extra fees that may be due if you pay off your loan early by refinancing the loan or by selling the home.
• Negative amortization: Occurs when the monthly payments in an adjustable-rate mortgage loan do not cover all the interest owed.

Sources: Consumer Financial Protection Bureau, Federal Reserve Board

Related Terms and Concepts

Additional terms can help you understand the full picture of your mortgage, from the initial agreement to ongoing obligations.

• Co-signer or co-borrower: Someone who agrees to take full responsibility to pay back a mortgage loan with you.
• Initial escrow deposit: The amount that you will pay at closing to start your escrow account, if required by your lender.

Sources: Consumer Financial Protection Bureau