Mortgage & Financing Terms, Explained

Mortgage terms in plain English - APR, interest rate, PMI, points, LTV, DTI, loan types, escrow and more.

Mortgage terms decide what a home really costs: the rate, the fees, the insurance and the structure of the loan. This hub explains them and how lenders decide what to offer you.

The journey follows a mortgage from your credit file to the first payment.

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• 2-1 Buydown (Temporary Rate Buydown)Intermediate

  A 2-1 buydown temporarily lowers a borrower's interest rate by 2 percentage points in year one and 1 percentage point in year two, before returning to the full note rate for the rest of the loan term.

• Adjustable-Rate Mortgage (ARM)Intermediate

  An ARM is a mortgage with an interest rate that starts fixed for an initial period, then adjusts periodically based on market rates — potentially rising or falling over the life of the loan.

• AmortizationIntermediate

  Amortization is paying off a loan through regular payments that cover each month's interest and part of the principal, so the balance reaches zero by the end of the term. It matters because early payments are mostly interest, which shapes how fast you build equity and what prepaying or refinancing saves.

• AppraisalIntermediate

  An appraisal is a licensed professional's independent opinion of a property's market value, ordered by a lender to confirm the home is worth at least the loan amount before approving financing.

• Appraisal GapIntermediate

  An appraisal gap is the amount by which a home's contract price exceeds its appraised value. It arises when the lender's appraisal comes in low, and matters because the lender lends on the lower value, so the buyer must cover the difference in cash, renegotiate, or cancel if a contingency allows it.

• APR (Annual Percentage Rate)Intermediate

  APR (annual percentage rate) is the yearly cost of a loan including the interest rate and certain lender charges, such as discount points and origination fees. It is used when comparing loan offers of the same type and term, and matters because two loans with the same rate can cost very different amounts.

• Assumable MortgageIntermediate

  An assumable mortgage lets a buyer take over the seller's existing loan — including its interest rate and remaining balance — instead of taking out a new mortgage, subject to lender approval of the buyer's qualifications.

• Balloon PaymentIntermediate

  A balloon payment is a large lump sum due at the end of a loan term, after a period of smaller payments that don't fully pay off the balance — common in seller-financed deals and some short-term commercial loans.

• Bridge LoanIntermediate

  A bridge loan is a short-term loan that lets a homeowner or investor access equity in a current property to fund a new purchase before the current property sells.

• Cash to CloseBasic

  Cash to close is the total amount a buyer must bring to closing: the down payment plus closing costs and prepaid items, minus any earnest money already deposited and any seller or lender credits. It appears on the Closing Disclosure, and matters because it is the cash you must actually have ready.

• Cash-Out RefinanceIntermediate

  A cash-out refinance replaces an existing mortgage with a larger loan, letting the homeowner receive the difference in cash — increasing the loan balance in exchange for accessing home equity.

• Clear to Close (CTC)Basic

  Clear to close (CTC) is the point at which a mortgage underwriter has confirmed every condition of the loan approval, so the lender can prepare final documents and schedule closing. It is the last lending milestone before you sign; until you have it, the loan can still be delayed or denied.

• Closing DisclosureIntermediate

  The Closing Disclosure is a standardized form lenders must give you at least three business days before closing. It lists the final loan terms, projected payments, closing costs and cash to close, so you can compare it with your Loan Estimate and question any change before you sign.

• Compensating FactorsIntermediate

  Compensating factors are strengths in a loan application — like large cash reserves, a low LTV, or a long employment history — that an underwriter weighs to approve a loan despite a weaker area elsewhere, like a higher DTI.

• Conforming Loan LimitIntermediate

  The conforming loan limit is the maximum mortgage amount Fannie Mae and Freddie Mac will purchase, set annually and adjusted higher in certain high-cost areas — loans above it are jumbo loans.

• Conventional LoanIntermediate

  A conventional loan is a mortgage not insured or guaranteed by a government agency, typically requiring a higher credit score than government-backed loans but avoiding certain government fees.

• Credit Score (Mortgage Qualification)Basic

  A credit score is a three-digit number (typically 300-850) summarizing a borrower's credit history, which lenders use alongside DTI and LTV to set mortgage eligibility and interest rate.

• Debt-to-Income Ratio (DTI)Intermediate

  Debt-to-income ratio (DTI) is the share of your gross monthly income that goes to debt payments, including the proposed mortgage payment. It is used when lenders decide how much you can borrow, and matters because a high DTI can limit or block approval even with good credit and steady income.

• Deed of TrustAdvanced

  A deed of trust secures a loan against real property using three parties — borrower, lender, and a neutral trustee who holds legal title until the loan is paid off — used instead of a mortgage in many states, mainly because it allows faster non-judicial foreclosure.

• Discount PointsIntermediate

  Discount points are a specific type of mortgage point purchased to permanently lower the interest rate on a loan; the cost only pays off if the borrower keeps the loan long enough for the lower rate to outweigh the upfront expense.

• Discounted Payoff (DPO)Advanced

  A discounted payoff (DPO) is an agreement where a lender accepts less than the full outstanding loan balance to fully satisfy and release the debt — typically negotiated on a distressed or underwater commercial loan rather than have it go to foreclosure.

• EscrowBasic

  Escrow is an arrangement in which a neutral third party holds money or documents on behalf of others. It is used during a purchase to hold earnest money until closing, and afterward in an escrow account that pays property taxes and insurance, which matters because those bills then become part of the monthly mortgage payment.

• Escrow Account (Impound Account)Intermediate

  A mortgage escrow (or impound) account is a fund a servicer maintains on a borrower's behalf, collecting a portion of property taxes and homeowners insurance with each monthly payment and paying those bills when due.

• Escrow ShortageIntermediate

  An escrow shortage occurs when a mortgage's escrow account doesn't have enough funds to cover the actual property tax and insurance bills — usually because those costs rose — requiring a lump-sum payment or a temporarily higher monthly payment to catch up.

• Escrow SurplusIntermediate

  An escrow surplus occurs when a mortgage's escrow account holds more than what's needed for upcoming tax and insurance bills — federal rules generally require the lender to refund surpluses above a certain amount to the borrower.

• FHA LoanIntermediate

  An FHA loan is a mortgage insured by the Federal Housing Administration, allowing lower down payments and credit scores than most conventional loans in exchange for mandatory mortgage insurance.

• Fixed-Rate MortgageIntermediate

  A fixed-rate mortgage has an interest rate that stays the same for the entire loan term, keeping principal-and-interest payments predictable from the first payment to the last.

• Gift LetterIntermediate

  A gift letter is a signed statement from a family member or approved donor confirming that money given toward a down payment is a gift, not a loan that must be repaid — required by most lenders before they'll count gifted funds toward a down payment.

• Hard Money LoanIntermediate

  A hard money loan is a short-term loan from a private lender, secured by the property itself rather than the borrower's credit — funded faster than a conventional loan, but at higher interest rates and shorter terms, commonly used for fix-and-flip purchases.

• HELOC (Home Equity Line of Credit)Intermediate

  A HELOC is a revolving line of credit secured by a home's equity — similar to a credit card, letting a homeowner borrow, repay, and re-borrow up to a set limit during a draw period, usually at a variable interest rate.

• Home Equity LoanIntermediate

  A home equity loan is a lump-sum loan secured by a home's equity, repaid in fixed monthly installments at a fixed interest rate — distinct from a HELOC's revolving, variable-rate credit line.

• InterestBasic

  Interest is the cost of borrowing money, charged by the lender as a percentage of the outstanding loan balance.

• Interest RateBasic

  The interest rate is the yearly percentage a lender charges on the loan principal, before any fees. It is used to calculate the monthly principal and interest payment, and matters because even a small difference in rate changes the payment and the total interest paid over the life of the loan.

• Interest-Only LoanIntermediate

  An interest-only loan lets a borrower pay only the interest for an initial period (often 5-10 years), with no principal reduction, before payments increase to include principal.

• Jumbo LoanIntermediate

  A jumbo loan is a mortgage larger than the conforming loan limit set annually by the Federal Housing Finance Agency, meaning it can't be purchased by Fannie Mae or Freddie Mac and typically requires stronger credit and a larger down payment.

• Land Contract (Contract for Deed)Intermediate

  A land contract is a seller-financing arrangement where the buyer makes payments directly to the seller and takes possession, but the seller keeps legal title until the contract is paid in full.

• Loan EstimateIntermediate

  The Loan Estimate is a standardized form a lender must give you within three business days of a mortgage application. It shows the estimated interest rate, monthly payment, closing costs and cash to close in the same format at every lender, which makes competing offers easy to compare.

• Loan Origination FeeIntermediate

  A loan origination fee is a charge from the lender for processing a new loan application, typically expressed as a percentage of the loan amount.

• Loan-to-Value (LTV)Intermediate

  Loan-to-value (LTV) is the loan amount divided by the property's value - for a purchase, usually the lower of the price and the appraisal - shown as a percentage. It is used when lenders price and approve a mortgage, and matters because it decides mortgage insurance, rate tiers and how much you can borrow.

• MortgageBasic

  A mortgage is a loan used to purchase real estate, secured by the property itself — if the borrower stops making payments, the lender can foreclose and take ownership of the home.

• Mortgage Insurance Premium (MIP)Intermediate

  MIP (mortgage insurance premium) is the mortgage insurance required on FHA loans. It is charged as an upfront premium, which can be financed into the loan, plus an annual premium paid monthly, in most cases regardless of down payment size. It protects the lender and adds to the borrower's monthly cost.

• Mortgage PointsIntermediate

  Mortgage points are optional upfront fees paid at closing to reduce a loan's interest rate — each point typically costs 1% of the loan amount and lowers the rate by a fraction of a percent.

• Mortgage Rate BuydownIntermediate

  A mortgage rate buydown is an upfront payment that lowers a borrower's interest rate, either permanently through discount points or temporarily for the first years, as in a 2-1 buydown. It is often paid by a seller or builder, and matters because it lowers payments but only saves money if its cost is recovered.

• Mortgage RecastIntermediate

  A mortgage recast is when a borrower makes a large lump-sum payment toward their loan principal, and the lender re-amortizes the remaining balance over the original term — lowering the monthly payment without changing the interest rate or requiring a full refinance.

• Mortgage ServicerIntermediate

  A mortgage servicer is the company that collects monthly payments, manages the escrow account, and handles day-to-day loan administration — which may be a different company than the lender who originated the loan.

• Negative AmortizationAdvanced

  Negative amortization occurs when a loan's payment is smaller than the interest accruing, so unpaid interest gets added to the principal balance — meaning the loan balance grows over time instead of shrinking.

• Non-QM LoanIntermediate

  A non-QM (non-qualified mortgage) loan is a mortgage that doesn't meet the federal "qualified mortgage" standards for verifying a borrower's ability to repay — used for self-employed borrowers, DSCR-based investor loans, and other cases standard underwriting doesn't fit well.

• Non-Recourse LoanIntermediate

  A non-recourse loan limits the lender's recovery in a default to the property itself — the borrower isn't personally liable for any remaining balance after foreclosure.

• Option to PurchaseIntermediate

  An option to purchase gives a tenant or buyer the exclusive right — but not the obligation — to buy a property at a set price within a specified time period, usually in exchange for a non-refundable option fee.

• Piggyback Loan (80-10-10)Intermediate

  A piggyback loan pairs a primary mortgage with a second loan, most commonly an 80-10-10 structure: an 80% first mortgage, a 10% second loan (often a HELOC), and a 10% down payment.

• PITIIntermediate

  PITI stands for principal, interest, taxes and insurance - the four parts of a typical monthly mortgage payment. Lenders use the full PITI amount, plus any mortgage insurance and HOA dues, to judge affordability, so property taxes and insurance can change how much home a buyer qualifies for.

• Portfolio LoanIntermediate

  A portfolio loan is a mortgage a lender keeps and services itself instead of selling to Fannie Mae, Freddie Mac, or another investor — giving the lender flexibility to use its own underwriting guidelines rather than standard conforming rules.

• Pre-ApprovalBasic

  A pre-approval is a lender's conditional statement that it is willing to lend a specific amount, based on a review of your credit, income, assets and documents. It is stronger than a pre-qualification and often expected with an offer, but it is not a loan commitment.

• Pre-QualificationBasic

  A pre-qualification is an informal, non-binding estimate of how much a buyer might be able to borrow, usually based on self-reported income, debts and assets rather than verified documents. It is useful for early budgeting, but sellers give it little weight and lenders use the term inconsistently.

• Prepaids (Prepaid Items)Intermediate

  Prepaids are amounts paid at closing for expenses that belong to the period after you own the home - typically mortgage interest from the closing date to the end of the month, the first year of homeowners insurance, and initial deposits that fund your escrow account.

• PrincipalBasic

  Principal is the amount of money borrowed on a loan, not including interest — mortgage payments are split between reducing the principal balance and paying interest.

• Private Mortgage Insurance (PMI)Intermediate

  Private mortgage insurance (PMI) is insurance most conventional lenders require when a borrower puts down less than 20%; it protects the lender, not the borrower, if the loan defaults. The borrower pays it, usually monthly, and it matters because it raises the payment until it is cancelled or ends.

• Rate LockIntermediate

  A rate lock is a lender's commitment to hold a specific interest rate for a set period while a loan is processed, protecting the borrower from rate increases before closing.

• RefinanceIntermediate

  Refinancing replaces an existing mortgage with a new loan, typically to secure a lower interest rate, change the loan term, or convert home equity to cash.

• Rent-to-Own (Lease Option)Intermediate

  Rent-to-own combines a standard lease with an option (or obligation) to purchase the home later, often at a price set in advance — a portion of rent may be credited toward the eventual purchase.

• Reserves (Mortgage)Intermediate

  Reserves are liquid savings — typically measured in months of the full PITI payment — a borrower has left over after closing, which lenders check to confirm a borrower can keep paying if income is temporarily disrupted.

• Reverse MortgageIntermediate

  A reverse mortgage lets homeowners age 62 or older convert home equity into cash — paid as a lump sum, line of credit, or monthly payments — without monthly mortgage payments, with the loan repaid when the borrower sells, moves out, or passes away.

• Right of RescissionAdvanced

  The right of rescission is a federal Truth in Lending Act protection giving homeowners three business days to cancel certain refinance or home equity loans on their primary residence — funds can't be disbursed until that period expires, sometimes noted as a transaction being "subject to statutory rescission."

• Second MortgageIntermediate

  A second mortgage is any loan secured by a home that's subordinate to an existing first mortgage — including HELOCs and home equity loans — meaning the first lender gets paid first if the home is sold or foreclosed on.

• Seller FinancingIntermediate

  Seller financing is an arrangement where the seller acts as the lender, letting the buyer make payments directly to them instead of — or in addition to — obtaining a traditional bank mortgage.

• SubordinationIntermediate

  Subordination is the ranking of multiple loans against the same property by priority of repayment if the home is sold or foreclosed on — a "subordination agreement" is what lets a new loan legally take a lower-priority position than an existing one.

• UnderwritingIntermediate

  Underwriting is the lender's process of verifying a borrower's income, assets, credit, and the property details to make a final decision on whether to approve a loan.

• USDA LoanIntermediate

  A USDA loan is a mortgage guaranteed by the U.S. Department of Agriculture for eligible buyers purchasing in designated rural and suburban areas, often with no down payment required.

• VA LoanIntermediate

  A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible service members, veterans, and surviving spouses, often requiring no down payment and no ongoing mortgage insurance.

• Verification of Employment (VOE)Intermediate

  A verification of employment is a lender's direct confirmation with a borrower's employer of their job status and income, typically performed both during underwriting and again just before closing.

• Wraparound MortgageAdvanced

  A wraparound mortgage is a form of seller financing where a new loan "wraps around" the seller's existing mortgage — the buyer pays the seller, and the seller continues paying their original lender out of those payments.

Sources: When can I remove private mortgage insurance (PMI) from my loan? (Consumer Financial Protection Bureau); Loan Estimate explainer (Consumer Financial Protection Bureau); What's a lock-in or a rate lock on a mortgage? (Consumer Financial Protection Bureau). Last reviewed October 23, 2026.

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Definitions are provided for general educational purposes and are not financial, legal, tax, or real estate advice. Rules vary by transaction and location - verify important decisions with qualified professionals.