Mortgage Glossary
Mortgage terms in plain language, each with what it means for your money as well as the definition.
Which mortgage terms matter most?
Five carry most of the weight. PITI is what actually leaves your bank account each month, not the principal-and-interest figure in a rate quote. LTV drives pricing, mortgage insurance and how much equity you can access. DTI decides how much a lender will lend. Closing costs are the numerator of every break-even calculation. And the break-even point is what tells you whether a refinance actually pays off before you move.
- Adjustable-rate mortgageARMAn ARM has a fixed introductory rate for a set period, then adjusts periodically against an index. Payments can rise or fall after the fixed period ends.
- Amortization scheduleAn amortization schedule is the month-by-month table showing how each payment splits between interest and principal, and what balance remains after every payment.
- Annual percentage rateAPRAPR expresses the cost of a loan as a yearly rate that includes both the interest rate and most lender fees. It is designed to make offers with different fee structures comparable.
- Break-even pointThe break-even point is the month at which the accumulated savings from a refinance finally exceed what it cost you to get it. Before that month you are behind; after it you are ahead.
- Cash-out refinanceA cash-out refinance replaces your mortgage with a larger one and pays you the difference in cash at closing. It increases both your balance and your loan-to-value ratio.
- Closing costsClosing costs are the fees required to originate a mortgage: origination, appraisal, title, recording, and prepaid items. On a refinance they commonly run about 2% to 5% of the loan amount.
- Debt-to-income ratioDTIDTI is your total monthly debt payments divided by your gross monthly income. Lenders use it to judge capacity; you can use it as a personal budgeting ceiling.
- Discount pointsA discount point is an upfront fee equal to 1% of the loan amount, paid to lower your interest rate. Points only pay off if you keep the loan long enough to recover the cost.
- Escrow accountAn escrow account is held by your servicer to collect property taxes and insurance premiums monthly and pay those bills when they come due.
- Extra principal paymentAn extra principal payment is money paid above the required amount and applied directly to the balance. It shortens the loan and cuts total interest, but does not lower the required monthly payment.
- FHA loanAn FHA loan is a mortgage insured by the Federal Housing Administration, part of HUD. Because of that insurance, lenders accept a smaller down payment and a lower credit score than most conventional loans allow.
- Fixed-rate mortgageA fixed-rate mortgage keeps the same interest rate and the same principal-and-interest payment for the entire term.
- HOA duesHomeowners association dues are recurring fees for shared amenities and maintenance in a managed community or condominium. They are a real housing cost that most rate quotes ignore.
- Home equityHome equity is your home's current value minus everything owed against it. It grows through principal payments and through appreciation.
- Home equity line of creditHELOCA HELOC is a revolving credit line secured by your home. It sits behind your existing mortgage as a second lien, and its rate is usually variable.
- Home equity loanA home equity loan is a fixed-rate second mortgage drawn in full at closing and repaid on a fixed schedule. Your first mortgage stays exactly as it is.
- Homeowners insuranceHomeowners insurance covers damage to your property and liability claims. Lenders require it for the life of the loan, and it is normally collected monthly through escrow.
- Interest rateA mortgage interest rate is the yearly percentage a lender charges on the balance you still owe. It decides how much of each monthly payment is interest and how much pays down the loan.
- Loan termThe loan term is the number of years over which the mortgage is scheduled to be repaid, most commonly 30 or 15 years in the US.
- Loan-to-valueLTVLoan-to-value is your loan balance divided by the home's value, expressed as a percent. It drives pricing, mortgage insurance requirements, and how much equity you can access.
- Mortgage recastA recast applies a lump sum to your principal and then re-amortizes the smaller balance over your remaining term, keeping your existing interest rate and payoff date. It lowers the required monthly payment.
- Mortgage refinanceA mortgage refinance replaces your existing home loan with a new one, usually to change the interest rate, the loan term, or both. The old loan is paid off in full at closing.
- PITIPITI stands for principal, interest, taxes and insurance, the four components of a typical escrowed mortgage payment. It is the amount that leaves your bank account each month.
- Principal and interestP&IPrincipal and interest is the portion of your mortgage payment that repays the loan itself. It excludes property taxes, homeowners insurance, mortgage insurance, and HOA dues.
- Private mortgage insurancePMIPMI protects the lender, not you, and is commonly required on conventional loans when the loan-to-value ratio exceeds 80%. It typically costs about 0.3% to 1.5% of the loan per year.
- Property taxProperty tax is an annual levy by local government based on your home's assessed value. It is normally collected monthly through escrow and paid on your behalf.
- Rate-and-term refinanceA rate-and-term refinance changes your interest rate, your loan term, or both, without increasing the amount you borrow beyond closing costs. No cash goes to the borrower.