Mortgage Glossary
Mortgage Terms, Explained in Plain English
A
Adjustable-Rate Mortgage (ARM)
A home loan whose interest rate stays fixed for an initial period (often 5, 7, or 10 years) and then adjusts at set intervals based on market conditions. ARMs are usually labeled with two numbers, such as 7/6: the first is the fixed period in years, the second is how often the rate adjusts afterward, in months. ARMs can make sense for buyers who expect to move or refinance before the fixed period ends.
Amortization
The schedule by which your loan is paid down over time. Early payments go mostly toward interest; as the balance shrinks, a growing share of each payment goes toward principal. A fully amortized loan reaches a zero balance at the end of its term.
Annual Percentage Rate (APR)
A broader measure of borrowing cost than the interest rate alone. APR folds certain lender fees and charges into a single annualized figure, which is why it is almost always slightly higher than the note rate. It exists to help borrowers compare the true cost of different loan offers on equal footing.
Appraisal
A professional opinion of a home's market value, performed by a licensed, independent appraiser. Lenders require an appraisal to confirm the property is worth enough to support the loan amount. The appraiser is selected independently; neither the buyer nor the lender chooses a specific individual.
Appraisal Gap
The difference between the price a buyer agreed to pay and a lower appraised value. Because lenders base the loan on the appraised value, a gap typically means the buyer must bring extra cash, renegotiate the price, or walk away if their contract allows it.
Assets
Anything of monetary value you own: checking and savings balances, retirement accounts, investments, vehicles, and other property. Lenders document assets to confirm you have funds for the down payment, closing costs, and reserves.
Assumable Mortgage
A loan that a qualified buyer can take over from the seller, keeping the original interest rate and terms. Most government-backed loans (FHA, VA, USDA) are assumable with lender approval; most conventional loans are not.
B
Bridge Loan
Short-term financing that lets you tap the equity in your current home to buy your next one before the first home sells. A bridge loan can free you to make an offer that does not depend on selling first, which matters in competitive markets.
Buydown
Paying money upfront to lower the loan's interest rate. A permanent buydown (paying discount points) reduces the rate for the life of the loan. A temporary buydown, such as a 2-1 buydown, lowers the rate for the first two years before it steps up to the full note rate. Sellers and builders sometimes fund buydowns as an incentive.
C
Cash to Close
The total amount you need to bring to closing: down payment plus closing costs, minus your earnest money deposit and any credits. Your Closing Disclosure spells out this figure before closing day.
Closing
The final step of the transaction, where documents are signed, funds change hands, and ownership transfers to the buyer. Also called settlement. In Wisconsin and many other states, closings are typically handled by a title company.
Closing Costs
The fees and prepaid items due at closing beyond the down payment. These include lender charges, title and recording fees, the appraisal, prepaid property taxes and insurance, and initial escrow deposits. Closing costs commonly run 2% to 5% of the loan amount, depending on the property and location.
Closing Disclosure (CD)
The final, official statement of your loan terms and costs. Federal rules require your lender to deliver it at least 3 business days before closing so you have time to review it and compare it against your Loan Estimate.
Co-Borrower
A second person on the loan application who shares legal responsibility for repayment. A co-borrower's income, debts, and credit are all part of the qualification picture. A spouse, partner, or family member can serve as a co-borrower, and they do not always need to live in the home.
Comparable Sales (Comps)
Recently sold homes similar to the one being appraised, in the same area, used to estimate market value. Appraisers adjust for differences in size, condition, and features to arrive at their opinion of value.
Conforming Loan
A conventional loan that fits within federally set loan limits and the guidelines of Fannie Mae and Freddie Mac. Limits are updated annually and vary by county. Loans above the limit are called jumbo loans.
Contingency
A condition written into a purchase contract that must be satisfied before the sale goes through. Common examples include financing, appraisal, and inspection contingencies. Contingencies protect the buyer's earnest money if the deal falls apart for a covered reason.
Conventional Loan
A mortgage that is not insured or guaranteed by a government agency. Conventional loans are the most common type and offer flexible options on down payment, term, and mortgage insurance. With 20% down (or once you reach 20% equity), conventional loans carry no monthly mortgage insurance.
Credit Score
A three-digit number summarizing your credit history, used by lenders to gauge how reliably you have repaid debt. Mortgage lenders typically pull scores from all three bureaus. A higher score generally improves your loan options and pricing, but plenty of programs exist for buyers whose credit is still a work in progress.
D
Debt-to-Income Ratio (DTI)
Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. If you earn $6,000 a month and your debts (including the proposed mortgage payment) total $2,400, your DTI is 40%. Lenders use DTI to judge whether a payment fits comfortably within your finances.
Deed
The legal document that transfers ownership of real estate from seller to buyer. The deed is recorded with the county after closing, creating the public record of your ownership.
Discount Points
An upfront fee paid at closing to permanently reduce your interest rate. One point equals 1% of the loan amount. Whether points are worth it depends on how long you plan to keep the loan; your loan officer can run the break-even math with you.
Down Payment
The portion of the purchase price you pay out of pocket rather than finance. Despite the persistent myth, 20% down is not required. Conventional programs start at 3% down, FHA at 3.5%, and VA and USDA loans can require nothing down for eligible borrowers.
Down Payment Assistance (DPA)
Programs offered by state agencies, municipalities, and nonprofits that help eligible buyers cover the down payment or closing costs, often through grants or low-interest second loans. Eligibility usually depends on income, location, and sometimes first-time buyer status.
E
Earnest Money
A good-faith deposit a buyer submits with an offer, held in a neutral account until closing. It signals serious intent to the seller and is credited toward your down payment and closing costs at settlement. If the deal falls through for a reason covered by your contingencies, it is typically refunded.
Equity
The portion of your home you actually own: current market value minus what you still owe. Equity grows two ways: by paying down the loan and through appreciation. It can later be tapped through a refinance, home equity loan, or sale.
Escrow
A neutral third party holding money or documents until conditions are met. The word shows up twice in a mortgage transaction: earnest money sits in escrow before closing, and after closing, your escrow account collects a portion of taxes and insurance with each payment.
Escrow Account
An account your loan servicer maintains to pay property taxes and homeowners insurance on your behalf. A slice of each monthly payment goes into the account, and the servicer pays the bills when they come due. The servicer reviews the account annually and adjusts the monthly amount as taxes and premiums change.
F
Fannie Mae and Freddie Mac
The two government-sponsored enterprises that buy conventional loans from lenders, keeping money flowing through the mortgage market. They do not lend directly to consumers, but their guidelines shape what most conventional loans look like.
FHA Loan
A mortgage insured by the Federal Housing Administration, designed to widen access to homeownership. FHA loans allow down payments as low as 3.5% and tend to be forgiving on credit. In exchange, they carry an upfront and a monthly mortgage insurance premium.
First-Time Homebuyer
For most loan programs, anyone who has not owned a home in the past 3 years. That definition surprises people: you can have owned before and still qualify as a first-time buyer for certain programs and assistance.
Fixed-Rate Mortgage
A loan whose interest rate never changes. Your principal-and-interest payment stays the same from the first payment to the last, which makes budgeting straightforward. The 30-year fixed is the most popular mortgage in America; 15-year and 20-year terms trade a higher payment for faster payoff and less total interest.
Funding Fee
A one-time fee on VA loans, paid to the Department of Veterans Affairs, that keeps the program running without monthly mortgage insurance. The fee varies based on down payment and prior VA loan use, and it is waived entirely for veterans with service-connected disabilities and certain surviving spouses.
G
Gift Funds
Money given to you, typically by a family member, to help with the down payment or closing costs. Gift funds are allowed on most loan programs but must be documented with a gift letter confirming the money is not a loan in disguise.
Government-Backed Loan
Any mortgage insured or guaranteed by a federal agency: FHA, VA, or USDA. The government backing reduces lender risk, which translates into lower down payments and more flexible qualifying standards for borrowers.
H
Homeowners Association (HOA)
An organization that governs a condominium, townhome, or planned community, funded by dues from owners. HOA dues count in your debt-to-income calculation, and lenders review the association's finances on condo purchases.
Homeowners Insurance
A policy covering damage to your home and personal property, plus liability protection. Lenders require coverage in place before closing because the home secures the loan. Sometimes called hazard insurance in loan documents.
Home Inspection
A top-to-bottom evaluation of a home's condition by a professional inspector, ordered by the buyer. An inspection is different from an appraisal: the appraisal estimates value for the lender, while the inspection tells you what shape the house is in. Lenders do not require one, but skipping it is rarely wise.
I
Interest Rate
The annual cost of borrowing the loan principal, expressed as a percentage. Your rate is personal to you, shaped by your credit profile, down payment, loan type, property type, and the market on the day you lock. Two borrowers buying identical houses can receive different rates for good reasons.
Interest Rate Lock
A lender's commitment to hold your quoted rate for a set window, commonly 30 to 60 days, protecting you from market movement while your loan is processed. Locking too early or too late both carry tradeoffs, which is a conversation worth having with your loan officer rather than a guess.
J
Jumbo Loan
A mortgage that exceeds the conforming loan limits set for Fannie Mae and Freddie Mac. Because jumbo loans cannot be sold to the GSEs, they follow the lender's own guidelines and often require stronger credit and larger reserves.
L
Lender Credit
Money the lender contributes toward your closing costs, usually in exchange for a somewhat higher interest rate. It is the mirror image of paying points: credits lower your upfront cash but raise your long-term cost, while points do the reverse.
Lien
A legal claim against a property as security for a debt. Your mortgage is a lien; unpaid taxes or contractor bills can create liens too. Title work before closing exists largely to find and clear any liens so you receive clean ownership.
Loan Estimate (LE)
A standardized 3-page document your lender must send within 3 business days of your application, laying out the projected rate, payment, and closing costs. Its uniform format lets you read any lender's offer the same way.
Loan Officer (LO)
The licensed professional who reviews your finances, recommends loan options, structures your application, and stays with you from pre-approval to closing. At Thompson Kane, every borrower works with a specific loan officer and their team, with a direct line to both.
Loan Term
The length of time scheduled to repay the loan in full, most commonly 30 or 15 years. Shorter terms mean higher monthly payments but dramatically less interest paid over the life of the loan.
Loan-to-Value Ratio (LTV)
The loan amount divided by the home's value, expressed as a percentage. Put 10% down and your LTV is 90%. LTV influences your rate, your mortgage insurance requirement, and which programs you qualify for.
M
Mortgage
A loan secured by real estate. Technically, the mortgage is the legal instrument giving the lender a claim on the property if the loan is not repaid, while the promissory note is your promise to repay. In everyday use, the word covers the whole arrangement.
Mortgage Banker
A lender that originates, underwrites, funds, and closes loans with its own capital and its own in-house team. Thompson Kane is a direct mortgage banker, which means decisions are made by people down the hall rather than at an outside institution.
Mortgage Broker
An intermediary who shops a borrower's application to outside wholesale lenders. Brokers do not underwrite or fund loans themselves; the actual lending decision sits with a third party. This is a different model from a mortgage banker.
Mortgage Insurance
Coverage that protects the lender if a borrower defaults, generally required when the down payment is under 20%. On conventional loans it is called private mortgage insurance (PMI) and can be removed once you build enough equity. FHA loans carry a mortgage insurance premium (MIP) with different rules, which is a common reason borrowers later refinance from FHA to conventional.
N
Non-Occupant Co-Borrower
A co-borrower, often a parent, who signs onto the loan and shares responsibility without living in the home. Their income can help a buyer qualify under certain conventional and FHA guidelines.
O
Origination
The full process of creating a new loan: application, document collection, underwriting, approval, and funding. An origination fee, when charged, compensates the lender for this work and appears on your Loan Estimate.
P
PITI
Shorthand for the four components of a typical monthly housing payment: Principal, Interest, Taxes, and Insurance. When lenders evaluate affordability, they look at the whole PITI payment, not just principal and interest. HOA dues, where they apply, ride along as a fifth element.
Pre-Approval
A lender's written statement that you qualify for a loan up to a specific amount, based on verified income, asset, and credit documentation. A pre-approval letter gives your offer real weight with sellers because the financial review has already been done.
Pre-Qualification
An informal, early estimate of what you might borrow, based on information you describe rather than documents a lender has verified. Useful for ballpark planning, but it carries far less weight than a pre-approval when you are ready to make offers.
Principal
The amount you borrow, and at any given time, the amount you still owe excluding interest. Every payment reduces principal a little more than the one before it, thanks to amortization.
Private Mortgage Insurance (PMI)
Mortgage insurance on conventional loans with less than 20% down. PMI is temporary: you can request removal once your balance reaches 80% of the home's original value, and it cancels automatically at 78%. Its existence is what makes low-down-payment conventional loans possible.
Property Taxes
Taxes assessed by your county and municipality based on your home's assessed value. Most borrowers pay them monthly through an escrow account rather than in one or two large annual bills.
R
Refinance
Replacing your current mortgage with a new one, typically to lower the rate, shorten the term, remove mortgage insurance, or pull cash out of equity. A refinance involves a new application, an appraisal in most cases, and closing costs, so the math has to make sense for your situation.
Reserves
Funds you still have after closing, measured in months of mortgage payments. Some loan programs require a cushion of reserves; even when they do not, having one is simply good planning.
S
Seller Concessions
Closing costs the seller agrees to pay on the buyer's behalf, negotiated in the purchase contract. Each loan program caps how much a seller can contribute. Concessions can meaningfully reduce the cash a buyer needs at closing.
Servicer
The company that manages your loan after closing: collecting payments, maintaining the escrow account, and answering account questions. Servicing rights are sometimes transferred between companies, which changes where you send payments but never changes your loan terms.
T
Title
Your legal right of ownership in the property. Before closing, a title company researches the property's history to confirm the seller can legally transfer ownership and that no surprises are attached to it.
Title Insurance
A one-time-premium policy protecting against defects in ownership history, such as undisclosed liens, recording errors, or claims from unknown heirs. The lender's policy is required; an owner's policy, which protects you, is optional but strongly worth considering.
Title Search
The examination of public records tracing a property's ownership history, conducted before closing to uncover liens, easements, or competing claims that must be resolved before the sale.
U
Underwriting
The lender's detailed evaluation of your application: verifying income, assets, credit, and the property itself against program guidelines. The underwriter is the person who ultimately approves the loan. Because Thompson Kane underwrites in-house, questions get answered by colleagues rather than routed to another company.
USDA Loan
A zero-down mortgage guaranteed by the U.S. Department of Agriculture for homes in eligible rural and many suburban areas. Eligibility depends on both the property's location and household income limits. Far more areas qualify than the word rural suggests.
V
VA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, active-duty service members, and certain surviving spouses. VA loans allow zero down payment, require no monthly mortgage insurance, and consistently offer some of the strongest terms available. The benefit can be used more than once.
