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23 Important Mortgage Terms To Know

Michelle Giorlando9 minute read
September 22, 2022

Buying a home can be a complicated process with many moving parts and a lot of vocabulary to go with it. Some terms are likely more familiar than others, but it’s a good idea to have a refresher before jumping into the world of home buying.

Let’s look at some common terms in the context of the home buying process and answers to some frequently asked questions about them.

Mortgage Terminology Explained

Here are some of the most common and important mortgage terms that you should know.

  1. Adjustable-Rate Mortgage (ARM)
  2. Amortization
  3. Annual Percentage Rate (APR)
  4. Closing Costs
  5. Closing Disclosure
  6. Credit Score
  7. Debt-To-Income Ratio (DTI)
  8. Down Payment
  9. Escrow
  10. Fixed-Rate Mortgage
  11. Home Equity
  12. Interest Rate
  13. Loan Estimate
  14. Mortgage Lender
  15. Mortgage Loan
  16. Mortgage Points
  17. Mortgage Term
  18. Primary Mortgage Insurance (PMI)
  19. Property Taxes
  20. Real Estate Agent
  21. Refinance
  22. Right of Recission
  23. Underwriting

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage (ARM) is a type of home loan. The ARM offers a lower fixed interest rate at the beginning of the loan term, for a certain number of years (say, the first 5 years on a 30-year loan). This interest rate won’t rise for those years. However, after that initial fixed rate period ends, then your interest rate can fluctuate based on the market.

There are safeguards in place to ensure your rate doesn’t rise too high. Rate caps guarantee that your rate can only be raised a certain percentage each year, and a lifetime cap can ensure the rate can’t rise above a certain point at any time.


Amortization is the repayment schedule of your loan and shows where the funds are allotted on the principal balance or interest payment. In the beginning, a larger percentage of your monthly payment goes to paying down the interest. As you pay off your loan, your equity grows, and a larger percentage of your monthly payment goes to paying down the principal balance.

Your lender will give you a copy of the amortization schedule of your loan at closing.

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Annual Percentage Rate (APR)

Though it’s commonly confused with an interest rate, annual percentage rate (APR) is different. The APR is the rate that covers the total amount it costs to borrow money for a mortgage loan. This includes the interest rate and any other fees and costs associated with the loan. This is why the APR is usually a little higher than the interest rate itself.

APR can include origination fees, mortgage discount points, mortgage insurance fees and any other lender fees.

Closing Costs

Closing costs are the fees associated with a real estate transaction. These usually amount to 3% – 6% of the home’s purchase price, and they must be paid on closing day. They’re listed on the Closing Disclosure, so you’ll know the amount to bring to closing.

Closing Disclosure

A Closing Disclosure is a document that shows exactly what you need to bring to the closing appointment and presents the details of your loan. It will list your loan type, interest rate, monthly payment, loan term, down payment and the amount of money you’ll need to bring to closing.

You’re legally entitled to receive this at least 3 business days before your closing appointment so you have time to review it and compare it to your Loan Estimate. If there are any discrepancies, bring them to your lender immediately.

Credit Score

Your credit score gives a simple picture of your financial wellness and shows lenders if you make payments on time, utilize a lower portion of the credit available to you and manage your debt well.

Your credit score can affect which loan types you’re qualified for. Credit score also affects your interest rate. Generally, if your credit score is lower, you’ll qualify at a higher interest rate.

Debt-To-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is used in your mortgage approval. DTI is calculated by comparing your minimum monthly debt payments (such as credit cards, car payment and student loan debt) with your gross monthly income (that is, before taxes). This is expressed as a percentage.

The lower your DTI, the more likely you’ll be approved for a mortgage. Lenders want to make sure you’re able to make your loan payments.  

Down Payment

A down payment is a sum of money you pay upfront when your mortgage transaction is processed. It reduces the amount of money you borrow for your mortgage loan. For example, say you want to buy a house for $250,000, and you have $12,000 for a down payment. Your mortgage would then be for $238,000.

A down payment shows your mortgage lender that you are serious about buying a home. With money invested, you’re less likely to walk away. There are a few loan options with no down payment required, but most home loans require a down payment. Depending on the loan, you’ll be required to pay at least 3% of the home’s total purchase price. It’s a common misconception that you need a 20% down payment. Putting down less than 20% just means you’ll likely pay a little extra per month in mortgage insurance.


Escrow refers to a neutral third party that holds onto funds in a real estate transaction until the transaction is complete. It’s designed to protect both buyers and sellers.

While it’s part of the home buying process, escrow is often still used after the process is complete, in the form of an escrow account. This account holds a homeowner’s funds for property taxes and homeowners insurance. When you make your monthly mortgage payment, you pay an additional amount for taxes and insurance. That extra money is held for you in your escrow account and then your lender will pay your taxes and insurance for you either once or twice a year.

Fixed-Rate Mortgage

A fixed-rate mortgage is a home loan that charges the same interest rate over the life of the loan. This is a good option for people who want a more consistent monthly payment. However, even with a fixed-rate mortgage, your monthly payment can change from year to year. This is because your property taxes and homeowners insurance rates can fluctuate. Your monthly payment includes extra for these, so when they change, your monthly payment will change.

Home Equity

Home equity is the amount of money you have in the home after subtracting your mortgage balance and any liens on the property. It’s affected by the amount of your down payment, the amount left on your mortgage loan and the housing market conditions.

For example, let’s say you bought a house worth $300,000. You put $15,000 down and have paid off $50,000 of the balance so far. Your equity is $65,000. But now, let’s say the housing market is doing very well, and your house is now worth $325,000. That extra $25,000 is free equity, bringing your equity total to $90,000.

Interest Rate

Your interest rate is a charge your lender makes to you to lend you the money to buy or refinance your home. This rate is shown as a percentage, and the rate you qualify for will depend on several factors. These include your lender, loan type, credit and current market rates.

Loan Estimate

Your Loan Estimate is a document you receive after you apply for a loan. Generally, you’ll get it within 3 business days of applying. It contains information on the loan term and estimates on the interest rate, monthly payment amount and closing costs. Because the loan isn’t finalized, these numbers are just an estimate. You’ll receive the final numbers on your Closing Disclosure, which you’ll receive 3 business days before your closing appointment.

Mortgage Lender

A mortgage lender offers loans to borrowers to buy real estate. Lenders are also called mortgagees, as they are the ones offering the mortgage. The lender sets interest rates and underwrites loans according to their guidelines.

Mortgage Loan

A mortgage loan is also called a home loan or just a mortgage. This is a loan used to buy real estate. The borrower receives enough money to cover the cost of the home purchase, and the home itself is collateral for the mortgage lender. If the borrower stops making payments, the lender can foreclose on the house.

Mortgage Points

Mortgage points, also known as discount points, are a prepayment to reduce the interest rate of your loan. Each point is worth 1% of the total loan amount and reduces your interest rate by a certain amount. So, while it will cost more upfront, you may end up saving a lot more in interest over the life of the loan.

Mortgage Term

Your mortgage loan term is the amount of time you have to pay off your loan. The loan term also affects the amount you’ll pay monthly. A shorter term will have higher monthly payments, and a longer term will have lower monthly payments because you’re taking more time to pay the loan off.

Primary Mortgage Insurance (PMI)

Primary mortgage insurance, or PMI, is an extra payment you’ll make on a conventional loan each month if your down payment is less than 20%. This insurance protects your lender if you stop making payments, since buyers who put down smaller down payments are considered more of a risk to lenders.
Once you reach 20% equity in your home, you can contact your lender to cancel your PMI. Once you reach 22% equity, your PMI is usually automatically canceled.

Property Taxes

Property taxes are taxes paid by the owner of a property to the local city, county and state governments. They’re calculated based on many factors, but the primary factor is the home’s fair market value.

You’ll pay your property taxes once or twice a year, and many lenders will pay them for you out of your escrow account.

Real Estate Agent

A real estate agent is a professional who oversees a real estate transaction between a buyer and seller. The seller’s agent is also called the listing agent. While a real estate agent can represent a buyer or seller, they most likely will not represent both for the same transaction.

A real estate agent is paid by commission from the sale of the house. So, if you’re the seller, a percent of the home’s sale price will go to both your agent and the buyer’s agent.

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To refinance your home means you replace your old mortgage loan with a new one. Homeowners do this for a variety of reasons.

You can refinance your home to accomplish one or more of these goals:

  • Shorten or lengthen the loan term to reduce the number of years left on your mortgage or to reduce your monthly payment.
  • Lower your interest rate to pay less in interest over the life of your loan.
  • Take cash out of your home’s equity to use it for expenses or renovations.
  • Change your loan from an ARM to a fixed-rate loan.

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Right Of Recission

When you refinance your home, you have the right of recission – a period of time that you have the right to cancel your mortgage contract. You have 3 business days after your loan is finalized and you sign your promissory note (a legal agreement saying you’ll pay your loan by the maturity date) to change your mind and rescind your mortgage contract.


Underwriting is the process of confirming all of your financial details and securing the funding for your mortgage. The mortgage underwriter reviews your credit, income, assets and the home’s appraisal to ensure you qualify and can safely make your mortgage payments.

FAQs About Key Mortgage Terms

What term describes the borrower in a mortgage?

The borrower in a mortgage transaction is called the mortgagor, the one who is taking out the loan. The lender is referred to as the mortgagee, the one who is offering the mortgage.

What is included in closing costs?

Closing costs for a buyer are made up of fees and costs in three categories:

  • Loan closing fees: loan origination, title search, attorneys, discount points, credit check, prepaid interest and rate locks
  • Property fees: property taxes, appraisals, homeowners’ association and escrow
  • Insurance fees: homeowners insurance, primary mortgage insurance (PMI), mortgage insurance premiums (MIP) and funding for certain loan types

A seller will typically pay the real estate agent commission. This is usually split between the buyer’s agent and the seller’s agent. A buyer may ask for seller concessions to have the seller pay for a portion of their closing costs.

Why does my monthly payment change with an adjustable-rate mortgage?

Your monthly payment changes with an adjustable-rate mortgage for a few reasons. The first is that your rate, after the initial fixed period, will fluctuate based on current interest rates at that time. A rate cap ensures your lender can’t raise your rate over a certain amount.

The other reason your monthly payment changes is due to what you pay for homeowners insurance and property taxes. With each monthly payment you make, part of it is held in your escrow account to pay your taxes and insurance, and when those amounts change, your monthly payment can change to account for the new amounts.

What’s included in my monthly mortgage payment?

A monthly mortgage payment is made up of what’s referred to as PITI:

  • Principal
  • Interest
  • Taxes
  • Insurance

Each payment you make allots some funds to each of these. When any of them change (such as your property taxes rising), your monthly payment changes to reflect it. This recalculation of your monthly payment generally happens once or twice a year.

How does a cash-out refinance work?

A cash-out refinance allows you to replace your old loan with a new one while withdrawing some of your home’s equity in cash. Your new loan amount is larger than what you currently owe, because you’ll have added the equity to your original loan balance.

For example, say you owe $150,000 on your home loan, and have $40,000 in home equity that you’d like to use. Your cash-out refinance loan’s new balance would be $190,000, and you’d get that $40,000 in cash to do what you’d like, such as make renovations or consolidate debt.  

What’s the difference between an interest rate and annual percentage rate?

An interest rate is the annual cost to borrow the principal amount of your loan, while the APR includes all the associated fees and costs, including the interest rate. So, the APR includes the interest rate, but the interest rate doesn’t include the APR.

What’s the difference between a real estate agent and a REALTOR®?

A real estate agent operates under a real estate broker to close home transactions.

A REALTOR® is a real estate agent or broker who belongs to the National Association of REALTORS®. They’re bound by a code of ethics and must be experts in their field.

The Bottom Line

While the mortgage process can be complicated, the vocabulary doesn’t have to be. Now that you’ve gotten a look at the terms and frequently asked questions, you can get familiar with the mortgage process.

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Michelle Giorlando

Michelle Giorlando is a freelance writer who lives in metro Detroit. When she's not writing about homeownership, finances, and mortgages, she enjoys performing improv, gardening, and befriending the wildlife in her yard.