Mortgage Terms – What Do They Mean?

Mortgage Terms – What Do They Mean?

If you’re head starts spinning and you feel a little inept when you’re presented with a bunch of mortgage terms… well, you’re not the only one, my friends.  Whether you’re a first time homebuyer or it’s been a while since you’ve been in the real estate market, it’s good to have a cheat sheet to refer to.  So, without further ado, here you go.

  • Adjustable Rate Mortgage (ARM):  A mortgage in which the interest rate is adjusted periodically according to a preselected index.
  • Amortize:  The process of paying off a debt by regularly scheduled payments that include both principal and interest.  As payments are made over time, the principal balance is reduced until the entire load is repaid.
  • Annual Percentage Rate (APR):  The cost of credit expressed as a yearly rate.  The APR includes the prepaid interest rate, points, fees, and other credit charges that the borrower is required to pay, and is therefore a more complete measure of a loan’s cost than the interest rate alone.  The loan’s interest rate, not its APR, is used to calculate the monthly principal and interest payment.
  • Appraisal:  A report make by a qualified person setting forth an opinion or estimate of property value.  The term also refers to the process by which this estimate is obtained.
  • Closing Cost:  Money paid by the borrower in connection with the closing of a mortgage loan.  This generally involves an origination charge, discount points, and fees required for third party services, taxes and government recording fees.
  • Closing Disclosure:  A form used at closing that provides a statement of final loan terms, projected payments, closing costs and a summary of the transaction.
  • Commitment Letter:  A formal, written offer by a lender stating the terms under which it agrees to loan money to a borrower.
  • Debt-To-Income Ratio (DTI):  Compares a borrower’s anticipated monthly mortgage payment to their gross (pre-taxed) monthly earnings and their monthly debt requirements.  Monthly debt includes credit cards, car loans, student loans, consumer loans plus other financial obligations such as child support and alimony.  DTI is also known as the back-end-ratio.
  • Down Payment:  Money paid to make up the difference between the purchase price and the mortgage amount.
  • Escrow Account:  The segregated trust account in which escrow funds are held.
  • Fixed-Rate Mortgage:  A mortgage in which the interest rate and payments remain the same for the life of the loan.
  • Housing Expense Ratio:  Compares a borrower’s anticipated monthly mortgage payment to their total household gross monthly income (pre-taxed). The housing expense ratio is also known as the front-end ratio.
  • Loan Estimate:  A form provided when applying for a home loan that outlines the terms, projected payments, and estimated closing costs of the loan.
  • Loan-To-Value Ratio (LTV):  The ratio between the amount of a given mortgage loan and either the sales price or appraised value, whichever is lower.
  • Mortgage Insurance Premium (MIP):  The consideration paid by a mortgagor (borrower) for mortgage insurance – either to the FHA or to a private mortgage insurer.
  • PITI (Principal, Interest, Taxes, Insurance):  The most common components of a monthly mortgage payment.
  • Pre-Qualification:  The process of determining how much money a prospective home buyer may be eligible to borrow before applying for a mortgage loan.
  • Pre-Paids:  Closing costs related to the mortgage loan which are collected at loan closing – including per diem interest and initial deposits of monthly escrows of taxes and insurance.
  • Private Mortgage Insurance (PMI):  Insurance written by a private company protecting the mortgage lender against loss resulting form a mortgage default.
  • Processing:  The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.
  • Title:  The legal evidence of ownership rights to real property.
  • Underwriting:  Analysis of risk and setting of an appropriate rate and terms for a mortgage on a given property for given borrowers.

Terms and definitions courtesy of FM Lending Services.


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Learn More:

  • Click here to learn more about the Due Diligence Fee.
  • Click here to learn more about the Earnest Money Deposit.
  • Click here to learn more about the benefits of having a buyer’s agent.
  • Click here to learn more about the benefits of having a seller’s agent.

Happy Home Buying & Selling In North Carolina!

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