Loan Glossary

A mortgage whose interest rate changes periodically based on a benchmark index. Initial rate is usually lower than a fixed-rate loan, but payments can rise after the introductory period ends.

An independent professional estimate of a property's market value. Lenders require appraisals to ensure the collateral is worth at least the loan amount before approving a mortgage.

Taking over the seller's existing mortgage. VA and FHA loans are often assumable, potentially allowing a buyer to inherit a lower interest rate from a previous owner.

Replacing an existing mortgage with a larger loan and receiving the difference in cash. Homeowners use this to access home equity for renovations, debt payoff, or other purposes.

A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan amount limits set annually by the FHFA. Conforming loans typically offer lower interest rates than non-conforming (jumbo) loans.

A mortgage not insured or guaranteed by a government agency (unlike FHA, VA, or USDA loans). Conventional loans follow Fannie Mae/Freddie Mac guidelines and typically require higher credit scores and down payments.

A legal document used in some states instead of a mortgage. It transfers legal title to a neutral trustee until the loan is paid off, at which point the title returns to the borrower.

The portion of a property's purchase price paid upfront, not financed by the mortgage. A larger down payment reduces the loan amount, may eliminate PMI, and often results in a lower interest rate.

A mortgage insured by the Federal Housing Administration. FHA loans require as little as 3.5% down and allow credit scores as low as 580, making them popular with first-time buyers.

A mortgage with an interest rate that remains constant for the entire loan term. Monthly principal and interest payments never change, offering predictability and protection from rate increases.

The legal process by which a lender takes possession of a property after the borrower fails to make payments. The property is then sold to recover the outstanding loan balance.

The percentage of gross monthly income used for housing costs (mortgage principal, interest, taxes, and insurance — PITI). Most conventional loans prefer a front-end ratio under 28%.

A form previously required by RESPA providing an estimate of closing costs. Now replaced by the Loan Estimate (LE) disclosure under TRID (TILA-RESPA Integrated Disclosures).

A revolving line of credit secured by home equity. Borrowers can draw funds as needed during the draw period (typically 10 years), then repay the balance during the repayment period.

A lump-sum second mortgage secured by home equity, with a fixed interest rate and fixed monthly payments. Often called a "second mortgage" because it is subordinate to the primary mortgage.

A standard form previously used to itemize all charges imposed on a borrower and seller in a real estate transaction. Replaced by the Closing Disclosure (CD) under TRID rules.

Another term for an escrow account used by mortgage servicers to collect and pay property taxes and homeowners insurance. Required for most loans with less than 20% down.

A mortgage that exceeds the conforming loan limits set by the FHFA ($766,550 for most areas in 2024). Jumbo loans typically require stronger credit, larger down payments, and carry slightly higher rates.

A standardized disclosure form provided within 3 business days of a mortgage application. It summarizes key loan terms, projected payments, and estimated closing costs.

A set period during which a lender guarantees a specific interest rate on a mortgage. Rate locks typically range from 30 to 60 days and protect the borrower from rate increases while the loan is processed.

Strategies used by lenders to minimize losses from delinquent loans, including loan modifications, forbearance, short sales, and deed-in-lieu of foreclosure.

Insurance required on FHA loans regardless of down payment. Includes an upfront premium (1.75% of the loan amount) and annual premiums (0.55%–1.05% depending on loan terms) paid monthly.

A mortgage that does not meet Fannie Mae/Freddie Mac guidelines — either because of loan size (jumbo loans) or borrower qualifications. Generally carries higher interest rates.

The stated interest rate on a promissory note, which is the contractual rate the lender charges on the loan balance. Different from APR, which includes fees.

Principal, Interest, Taxes, and Insurance — the four components of a monthly mortgage payment. Lenders use PITI to calculate housing expense ratios for loan qualification.

Insurance required on conventional loans when the LTV exceeds 80%. PMI protects the lender if the borrower defaults. It can be removed when equity reaches 20%.

Prepaid interest paid at closing to reduce the mortgage interest rate. Each point costs 1% of the loan amount and typically reduces the rate by 0.25%. Also called "buying down the rate."

A lender's conditional commitment to lend a specific amount, based on verified income, assets, and credit. Pre-approval (stronger than pre-qualification) shows sellers the buyer is creditworthy.

An informal estimate of how much a borrower may be able to borrow, based on self-reported information without full verification. Less reliable than pre-approval.

Replacing an existing mortgage with a new one to get a lower interest rate, change the loan term, or both — without taking out additional cash. Different from a cash-out refinance.

Replacing an existing loan with a new loan, typically to lower the interest rate, change the loan term, switch from ARM to fixed, or access equity through a cash-out refinance.

A federal law requiring lenders to disclose settlement costs and prohibiting kickbacks between settlement service providers. Ensures borrowers receive fair, transparent loan information.

A loan secured by a property that already has a primary mortgage. In foreclosure, the first mortgage lender is paid first; the second mortgage is subordinate. Home equity loans are a common type.

Selling a property for less than the outstanding mortgage balance, with the lender's approval. A short sale avoids foreclosure but may result in a deficiency judgment and negatively impact credit.

Insurance protecting lenders (and optionally buyers) against losses from title defects, liens, or ownership disputes discovered after closing. Usually required by lenders.

A zero-down-payment mortgage guaranteed by the U.S. Department of Agriculture for eligible rural and suburban properties. Designed to help low-to-moderate income borrowers in qualified areas.

A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses. No down payment required and no PMI.