An Overview
Mortgage terminology can feel like a foreign language. This glossary defines the terms you are most likely to hear during the loan process, in plain English, grouped by category. Bookmark this page and refer back to it whenever a term comes up — understanding the vocabulary is half the battle.
Rate & Cost Terms
These terms describe how much your loan costs and how that cost is expressed. The distinction between interest rate and APR matters when comparing offers — APR reflects the true yearly cost including certain fees.
- Interest Rate — the yearly cost of borrowing, expressed as a percentage of the loan amount
- APR (Annual Percentage Rate) — the yearly cost including interest and certain fees, giving a truer comparison figure
- Discount Points — optional upfront fees paid to lower your rate — one point equals 1% of the loan amount
- Loan Estimate — the standardized form showing your rate, payment, and estimated costs, issued within 3 days of applying
- Closing Disclosure — the final version of your costs, issued at least 3 days before closing
Income & Qualifying Terms
Lenders use these figures to determine how much you can borrow. The two that matter most to your budget are DTI (how much of your income goes to debt) and LTV (how much of the home's value you are financing).
- DTI (Debt-to-Income) — the percentage of monthly income that goes to debt, including your new mortgage
- LTV (Loan-to-Value) — the loan amount divided by the home's value — a lower LTV often means better terms
- Reserves — savings the lender requires you to keep after closing, measured in months of payments
- Cash to Close — the total you bring to closing — down payment + closing costs − credits − earnest money
Process & Escrow Terms
These terms describe the mechanics of the transaction. Escrow is the neutral middle ground that holds funds and documents until conditions are met — underwriting is the lender's review of your file.
- Escrow — a neutral third-party account holding funds until conditions are met
- Earnest Money — a deposit showing good faith when your offer is accepted, applied toward closing costs
- Underwriting — the lender's verification of your income, assets, credit, and the property
- Clear to Close — the lender's final approval — your Closing Disclosure is issued and closing is scheduled
- Appraisal — an independent estimate of the property's value, ordered by the lender
Insurance & Protection Terms
Insurance protects both you and the lender. PMI is required on most conventional loans with less than 20% down and protects the lender — not you — in case of default. Title insurance protects against defects in the property's ownership history.
- PMI (Private Mortgage Insurance) — required on conventional loans with less than 20% down — cancelable once equity reaches 20%
- Title Insurance — protects against undiscovered ownership claims or liens on the property
- Homeowners Insurance — required by the lender — covers damage to the structure and liability
- Escrow Account — an account the lender uses to collect and pay your taxes and insurance on your behalf
