Mortgage Glossary

Key mortgage terms and definitions to help you navigate the home loan process with confidence

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Adjustable-Rate Mortgage (ARM)

An ARM is a mortgage with an interest rate that changes periodically based on a benchmark index. ARMs typically start with a lower fixed rate for an introductory period (such as 5, 7, or 10 years) before adjusting annually. While the initial rate is often lower than a fixed-rate mortgage, monthly payments can increase when the rate adjusts.

Amortization

The process of gradually paying off a loan through regular scheduled payments over time. Each payment is split between principal and interest. In the early years of a mortgage, a larger portion goes toward interest; over time, more of each payment is applied to the principal balance.

Annual Percentage Rate (APR)

The APR represents the total annual cost of borrowing, expressed as a percentage. Unlike the interest rate alone, the APR includes lender fees, discount points, and other charges, making it a more complete measure for comparing loan offers from different lenders.

Appraisal

A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require an appraisal before approving a mortgage to ensure the property is worth at least the amount being borrowed. The buyer typically pays the appraisal fee as part of closing costs.

Broker

A mortgage broker is a licensed professional who acts as an intermediary between borrowers and lenders. Rather than lending their own money, brokers shop multiple lenders to find competitive rates and terms on behalf of the borrower. Raider Mortgage Co. operates as a mortgage brokerage, giving clients access to a wide range of loan products.

Buydown

A financing technique where the borrower (or sometimes the seller) pays an upfront fee to reduce the mortgage interest rate for a set period or the entire loan term. A common example is a 2-1 buydown, where the rate is reduced by 2% in the first year and 1% in the second year before returning to the full rate.

Closing Costs

The fees and expenses paid at the closing of a real estate transaction, beyond the property price itself. Closing costs typically range from 2% to 5% of the loan amount and may include origination fees, appraisal fees, title insurance, attorney fees, recording fees, and prepaid items such as property taxes and homeowners insurance.

Closing Disclosure

A five-page document provided to the borrower at least three business days before closing. It details the final loan terms, projected monthly payments, closing costs, and how much cash the borrower needs to bring to closing. Borrowers should compare this document to their earlier Loan Estimate to check for any significant changes.

Conforming Loan

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan limits established by the Federal Housing Finance Agency (FHFA). Conforming loans typically offer lower interest rates than non-conforming loans because they can be sold on the secondary market to these government-sponsored enterprises.

Conventional Loan

A mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. Conventional loans typically require a minimum credit score of 620 and a down payment of at least 3% to 5%. Borrowers who put down less than 20% will need to pay private mortgage insurance (PMI).

Credit Score

A numerical representation of a borrower's creditworthiness, typically ranging from 300 to 850. Lenders use credit scores to assess the risk of lending and to determine interest rates. Higher scores generally qualify for better mortgage terms. Learn more in our credit score guide.

Debt-to-Income Ratio (DTI)

A financial metric that compares a borrower's total monthly debt payments to their gross monthly income, expressed as a percentage. Most lenders prefer a DTI of 43% or lower for mortgage approval, though some loan programs allow higher ratios. A lower DTI indicates a healthier balance between debt and income.

Deed of Trust

A legal document used in some states (including Texas) instead of a traditional mortgage. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds the title until the loan is paid off.

Down Payment

The portion of the home's purchase price that the buyer pays upfront in cash rather than financing through a mortgage. Down payment requirements vary by loan type: conventional loans may require as little as 3%, FHA loans require 3.5%, while VA and USDA loans offer zero-down options for eligible borrowers.

DSCR (Debt Service Coverage Ratio)

A metric used primarily for investment property loans that measures the property's net operating income relative to its debt obligations. A DSCR of 1.0 means the property generates just enough income to cover its mortgage payments. Most lenders require a DSCR of 1.2 or higher for investment property financing.

Earnest Money

A deposit made by the buyer when submitting an offer on a property, demonstrating serious intent to purchase. Earnest money is typically 1% to 3% of the purchase price and is held in an escrow account. If the sale closes, the earnest money is applied toward the down payment or closing costs. If the buyer backs out without a valid contingency, the seller may keep the deposit.

Equity

The difference between a property's current market value and the outstanding balance on the mortgage. Equity increases as the borrower makes payments and as the property appreciates in value. Homeowners can access their equity through a home equity loan or HELOC.

Escrow

An arrangement in which a neutral third party holds funds or documents on behalf of the transacting parties. In mortgages, escrow has two common uses: (1) an escrow account during the purchase process that holds the buyer's earnest money, and (2) an ongoing escrow account managed by the loan servicer to collect and pay property taxes and homeowners insurance on the borrower's behalf.

FHA Loan

A mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores or smaller down payments. FHA loans require a minimum credit score of 580 for a 3.5% down payment (or 500 with 10% down). They require both an upfront mortgage insurance premium (UFMIP) and annual mortgage insurance premiums (MIP).

Fixed-Rate Mortgage

A mortgage with an interest rate that remains the same for the entire loan term, providing predictable monthly payments. The most common terms are 15-year and 30-year fixed-rate mortgages. While the initial rate may be higher than an ARM, the stability of fixed payments is a significant advantage for long-term budgeting.

Flood Insurance

Insurance coverage that protects a property against flood damage. If a property is located in a FEMA-designated flood zone, the lender will require flood insurance as a condition of the mortgage. Flood insurance is not included in standard homeowners insurance policies and must be purchased separately, often through the National Flood Insurance Program (NFIP).

Good Faith Estimate (GFE)

A document historically provided by lenders that estimated the costs associated with a mortgage. The GFE has been largely replaced by the Loan Estimate form, which serves the same purpose with a standardized format that makes it easier for borrowers to compare offers from different lenders.

HELOC (Home Equity Line of Credit)

A revolving line of credit secured by the equity in your home. Unlike a home equity loan, which provides a lump sum, a HELOC allows you to borrow as needed up to a set credit limit during a draw period (typically 10 years). HELOCs usually have variable interest rates.

Homeowners Insurance

Insurance that protects the homeowner against losses from damage to the property, theft, and liability claims. Lenders require homeowners insurance as a condition of the mortgage. Premiums are often collected monthly as part of the escrow payment and paid annually by the servicer on the borrower's behalf.

Homestead Exemption

A legal provision that reduces the taxable value of a primary residence for property tax purposes. In Texas, the homestead exemption can significantly lower annual property tax bills. Homeowners must apply with their county appraisal district to receive the exemption.

HUD (U.S. Department of Housing and Urban Development)

The federal agency responsible for national housing policy and oversight of housing-related programs, including the FHA. HUD enforces fair housing laws and provides resources for homebuyers, renters, and community development programs.

Interest Rate

The percentage charged by a lender for borrowing money, expressed as an annual rate. The interest rate directly affects your monthly mortgage payment and the total cost of the loan over time. Rates are influenced by market conditions, the borrower's credit profile, loan type, and other factors. See our guide to understanding mortgage rates for more detail.

Insurance (PMI and MIP)

Mortgage insurance protects the lender if the borrower defaults on the loan. Private Mortgage Insurance (PMI) is required on conventional loans when the down payment is less than 20% and can be cancelled once equity reaches 20%. Mortgage Insurance Premium (MIP) is required on FHA loans and typically lasts the life of the loan unless the borrower refinances into a conventional loan.

Jumbo Loan

A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency. Jumbo loans are used to finance higher-priced properties and typically require higher credit scores, larger down payments, and more substantial cash reserves than conforming loans. Interest rates on jumbo loans may be slightly higher due to the increased risk to the lender.

Loan Estimate

A standardized three-page document that lenders are required to provide within three business days of receiving a mortgage application. It outlines the estimated interest rate, monthly payment, closing costs, and other key terms of the loan, making it easy to compare offers from different lenders.

Loan-to-Value Ratio (LTV)

A ratio comparing the mortgage amount to the appraised value of the property, expressed as a percentage. For example, a $240,000 loan on a $300,000 home equals an LTV of 80%. Lower LTV ratios represent less risk to the lender and may qualify borrowers for better rates. An LTV above 80% on a conventional loan typically requires private mortgage insurance.

MLS (Multiple Listing Service)

A database used by real estate professionals to share and access information about properties for sale. The MLS is the primary tool real estate agents use to list homes and search for properties on behalf of their clients. Listings on popular home search websites typically originate from MLS data.

Mortgage Insurance

Insurance that protects the lender (not the borrower) in case the borrower defaults on the loan. Mortgage insurance is typically required when the borrower's down payment is less than 20% of the home's value. It may take the form of PMI on conventional loans or MIP on FHA loans.

Mortgage Servicer

The company responsible for managing the day-to-day administration of a mortgage loan after closing. The servicer collects monthly payments, manages the escrow account, handles customer service inquiries, and processes payoffs. The servicer may or may not be the same entity that originated the loan.

NMLS (Nationwide Multistate Licensing System)

A nationwide system for registering and licensing mortgage loan originators and other financial service providers. Every licensed mortgage professional has a unique NMLS ID number that consumers can use to verify credentials and review disciplinary history through the NMLS Consumer Access website.

Origination Fee

A fee charged by the lender to process and underwrite a new mortgage loan. Origination fees are typically expressed as a percentage of the loan amount (often 0.5% to 1%) and are included in closing costs. This fee compensates the lender for the administrative work of evaluating and preparing the loan.

PITI (Principal, Interest, Taxes, and Insurance)

The four components that make up a typical monthly mortgage payment. Principal reduces the loan balance, interest is the cost of borrowing, taxes are property taxes (often collected through escrow), and insurance includes homeowners insurance and any mortgage insurance. PITI is the figure lenders use when calculating debt-to-income ratios.

Points (Discount Points)

Upfront fees paid to the lender at closing in exchange for a reduced interest rate. One point equals 1% of the loan amount. Paying points (also called buying down the rate) can lower your monthly payment and save money over the life of the loan, but it increases your upfront costs. Points make the most sense for borrowers who plan to stay in the home for a long time.

Pre-Approval

A lender's conditional commitment to lend a specific amount based on a thorough review of the borrower's financial information, including credit history, income, assets, and debts. Pre-approval involves a hard credit inquiry and carries more weight than pre-qualification. A pre-approval letter shows sellers that the buyer is a serious, qualified candidate. Learn more in our pre-approval guide.

Pre-Qualification

An informal estimate of how much a borrower may be able to borrow, based on self-reported financial information. Pre-qualification typically does not involve a hard credit check and is less rigorous than pre-approval. It provides a general idea of buying power but does not carry the same weight with sellers.

Principal

The original amount of money borrowed in a mortgage, not including interest or other charges. Each monthly payment reduces the principal balance. The principal, combined with the interest rate and loan term, determines the total cost of the mortgage.

Private Mortgage Insurance (PMI)

Insurance required by lenders on conventional loans when the borrower's down payment is less than 20% of the home's value. PMI protects the lender if the borrower defaults. It can be cancelled once the borrower reaches 20% equity in the home, either through payments or property appreciation.

Rate Lock

An agreement between the borrower and lender that guarantees a specific interest rate for a set period (typically 30 to 60 days) while the loan is being processed. A rate lock protects the borrower from rate increases during that window. If rates drop, the borrower is generally locked into the agreed-upon rate unless a float-down option was included.

Refinance

The process of replacing an existing mortgage with a new one, typically to secure a lower interest rate, change the loan term, switch from an ARM to a fixed rate, or access home equity through a cash-out refinance. Refinancing involves closing costs similar to the original mortgage, so borrowers should calculate the break-even point to determine if it makes financial sense.

Reverse Mortgage

A type of loan available to homeowners aged 62 and older that allows them to convert a portion of their home equity into cash without selling the home or making monthly mortgage payments. The loan is repaid when the borrower sells the home, moves out, or passes away. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the FHA.

Secondary Market

The marketplace where existing mortgages are bought and sold between lenders, investors, and government-sponsored enterprises such as Fannie Mae and Freddie Mac. The secondary market allows lenders to sell loans they have originated, freeing up capital to make new loans. This system helps keep mortgage rates competitive and credit widely available.

Title Insurance

Insurance that protects against financial loss from defects in the title to a property, such as undisclosed liens, ownership disputes, or recording errors. There are two types: lender's title insurance (required by the lender) and owner's title insurance (optional but recommended for the buyer). Title insurance is a one-time premium paid at closing.

Truth in Lending Act (TILA)

A federal law that requires lenders to disclose the terms and costs of credit to borrowers in a clear, standardized format. TILA ensures borrowers can compare loan offers on an equal basis by requiring disclosure of the APR, total finance charges, payment schedule, and total amount financed.

Underwriting

The process by which a lender evaluates the risk of making a mortgage loan to a borrower. During underwriting, the lender reviews the borrower's credit history, income, assets, employment, and the property's appraisal to determine whether the loan meets their guidelines. Underwriting is the final step before loan approval.

USDA Loan

A mortgage program backed by the U.S. Department of Agriculture, designed to help low- to moderate-income borrowers purchase homes in eligible rural and suburban areas. USDA loans offer zero down payment, competitive interest rates, and reduced mortgage insurance costs. Eligibility is based on income limits and property location.

VA Loan

A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, National Guard members, and surviving spouses. VA loans offer significant benefits including no down payment, no private mortgage insurance, competitive interest rates, and limited closing costs.

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Related Resources

Pre-Approval Guide

Learn what to expect during the pre-approval process and how to prepare.

Understanding Mortgage Rates

Explore the factors that influence mortgage rates and strategies to secure the best terms.