Understanding the terminology around mortgages can make the conversations you have with lenders, as well as your real estate agent and lawyer so much easier. A mortgage is a big financial commitment. It will be part of your life for a long time and will significantly impact your credit. Brushing up on mortgage terminology ensures you will be informed and a part of the mortgage process.

Adjustable Rate Mortgage

Sometimes this is abbreviated as ARM. An ARM loan has a fixed interest rate and repayment period. At the start the interest rate is low. After the initial period expires the interest rate will be adjusted. The interest rate will continue to be adjusted at predetermined intervals.

Fixed Rate Mortgage

Is when the interest rate is finalized ahead of time, along with the term, or length of time the borrower must repay the loan. For a fixed rate mortgage, the interest rate will not change.


This is a repayment schedule for your loan. The amortization breaks down each payment into how much goes towards interest and how much goes to the principal for the life of the loan.

Origination Fee

Some lenders require the borrower to pay a fee upfront. This money will be used to cover appraisals and other expenses tied to the loan. These expenses are sometimes part of the closing costs.

Closing Costs

This are a variety of fees associated with the mortgage closing. Closing costs include title transfer fees, recording fees, attorney fees and more.

Debt-to-Income Ratio

This is a comparison of how much debt a person has and how much money they make. Banks use this ratio to determine if a borrow will be able to repay a mortgage.


The value of a property is determined by an appraiser. He or she evaluates a home in person to determine the value. The property being appraised will be compared to similar homes in the area that have recently sold. Often a bank will require an up-to-date appraisal to ensure the amount of the mortgage does not exceed the value determined by the appraisal.

Down Payment

Money the buyer puts towards the purchase of a property. A lender may require a buyer to pay a specific amount for a down payment as a condition of being approved for a mortgage.


The current market value of a property minus the balance due on the mortgage. Essentially, this is, or close to, what a homeowner would make in profit if they sell their home while it is still under mortgage.


Sometimes the borrower has a choice if they want to set up their mortgage loan to be escrowed; other times the bank mandates the loan be escrowed. When a mortgage is escrowed the lender will set aside a portion of each month’s payment into an account that is managed by the lender. This money is used to pay taxes and homeowner’s insurance.

Homeowner’s Insurance

A homeowner’s insurance policy covers property and liability coverage. A homeowner is typically required to have a policy in place before the closing.

Loan-to-Value Ratio

This is a value that compares the amount of the mortgage loan to the value of the home. Lenders use this value to determine if a property qualifies for a mortgage. Each lender has different guidelines, but generally lenders prefer the loan-to-value ratio be less than 80 percent. In cases of a high percentage the borrower can make a down payment to put the ratio into a range the lender will approve.

Private Mortgage Insurance

If the loan-to-value ratio is above the threshold set by the lender, and the borrower is unable to make a down payment the transaction may not go through. When this happens, borrowers can seek out Private Mortgage Insurance (PMI). PMI is insurance that will pay the lender if the borrower defaults on the loan before the loan-to-value ratio drops below the threshold set by the lender.


Lenders sometimes give the borrowers the option to purchase points, or rather a percentage of the loan amount. Essentially, the borrower pays some of interest right away to lower the interest rate going forward. This practice will save the borrower money over the course of the loan if the homeowner stays in the home until the mortgage loan is paid off. If the borrower sells the property within a few years they will not be able to take advantage of the lower interest.


If a homeowner owes a debt to a financial institution, business or even a private individual that business or person can place a claim on property owned by the debtor until the debt is paid.

Title Insurance

This policy protects the lender if the mortgage loan falls through because there is a lien on the property. A borrower is often required by the lender to obtain this coverage before the closing.

Understanding Mortgage Language

Being informed and knowing the common terms enables you to understand what mortgage and real estate professionals are saying. This information allows you to make informed decisions as you move through the mortgage process.

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