Loan & Mortgage Glossary

A mortgage whose interest rate changes periodically based on a benchmark index such as SOFR or the prime rate. ARMs typically start with a fixed-rate period (e.g. 5 years in a 5/1 ARM), then adjust annually. Initial rates are usually lower than fixed-rate mortgages, but payments can rise significantly if rates increase.

The process of paying off a loan through regular scheduled payments over time. Each payment covers both interest and principal, but the split changes gradually — early payments are mostly interest, while later payments are mostly principal. A full amortization schedule shows exactly how much of each payment goes toward each component every month.

A complete table showing every scheduled payment of a loan from the first to the last. Each row shows the payment number, payment amount, the portion applied to interest, the portion applied to principal, and the remaining loan balance. Reviewing your amortization schedule is one of the most valuable things a borrower can do.

A broader measure of the annual cost of borrowing that includes not just the interest rate but also most fees and charges associated with the loan — such as origination fees, broker fees, and discount points — expressed as a yearly percentage. APR makes it easier to compare loan offers from different lenders on a like-for-like basis.

An independent professional assessment of a property's market value, typically required by lenders before approving a mortgage. The appraised value determines the maximum loan amount and affects the loan-to-value (LTV) ratio. If the property appraises below the purchase price, the lender may require a larger down payment.

Anything of monetary value owned by a borrower that a lender may consider when assessing creditworthiness. Assets include cash, savings, investments, retirement accounts, and real estate. Lenders often require borrowers to demonstrate sufficient liquid assets to cover a certain number of months of loan payments (reserves).

A large lump-sum payment due at the end of a loan term that covers the remaining principal balance. Balloon loans have lower monthly payments during the loan term because they do not fully amortize. The borrower must either pay the balloon amount in full, sell the asset, or refinance when it comes due.

A short-term loan used to "bridge" the gap between two financial events — most commonly, buying a new home before selling an existing one. Bridge loans typically carry higher interest rates than conventional mortgages and are designed to be repaid quickly, usually within 6 to 12 months.

A limit on how much an adjustable-rate mortgage's interest rate can increase — at each adjustment period (periodic cap), over the life of the loan (lifetime cap), or both. For example, a 2/6 cap means the rate can rise by no more than 2% per adjustment and no more than 6% over the entire loan term.

A refinancing option where the new mortgage is larger than the existing loan balance, and the borrower receives the difference in cash. For example, if your home is worth $500,000 and you owe $300,000, you might refinance for $380,000 and receive $80,000 cash. The trade-off is a higher loan balance and often a higher monthly payment.

Fees and expenses paid at the closing of a real estate transaction, on top of the property purchase price. They typically range from 2% to 5% of the loan amount and may include lender origination fees, appraisal fees, title insurance, attorney fees, prepaid interest, and property taxes. Some closing costs can be rolled into the loan.

An asset pledged by a borrower to secure a loan. If the borrower defaults, the lender has the right to seize and sell the collateral to recover the outstanding debt. For mortgages, the property being purchased serves as collateral. For auto loans, the vehicle is the collateral. Secured loans generally offer lower interest rates than unsecured loans.

Interest calculated on both the initial principal and the accumulated interest from previous periods. In borrowing, compound interest can cause debt to grow rapidly if payments do not at least cover the interest charge each period. Most standard mortgages use simple interest calculated on the outstanding balance, but credit cards and some personal loans may compound more frequently.

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan size limits (the conforming loan limit, which is $766,550 for most U.S. areas in 2024). Conforming loans are easier to sell on the secondary market and typically carry lower interest rates than non-conforming (jumbo) loans.

A numerical representation of a borrower's creditworthiness, typically ranging from 300 to 850 (FICO scale). It is calculated using payment history, credit utilisation, length of credit history, types of credit, and recent inquiries. Most mortgage lenders require a minimum score of 620–640 for conventional loans; higher scores unlock lower interest rates and better terms.

A lender's measure of your monthly debt obligations compared to your gross monthly income, expressed as a percentage. It is calculated by dividing total monthly debt payments (including the proposed new loan) by gross monthly income. Most conventional lenders prefer a DTI of 43% or below. A lower DTI generally means better loan terms and higher approval likelihood.

Failure to meet the legal obligations of a loan agreement — most commonly, missing one or more required payments. Depending on the loan terms and jurisdiction, default can trigger late fees, credit score damage, collection activity, repossession of collateral, or foreclosure on a mortgaged property. Most lenders define default as being 30 or more days past due.

A loan is considered delinquent when a payment is overdue but the loan has not yet formally defaulted. Delinquency is typically reported to credit bureaus after 30 days past due and can significantly damage a borrower's credit score. Lenders may begin collection procedures after 60–90 days of delinquency.

Upfront fees paid to a lender at closing in exchange for a reduced interest rate. One point equals 1% of the loan amount. Paying points makes sense if you plan to keep the loan long enough for the interest savings to exceed the upfront cost — this break-even period is typically 3–7 years. Points may be tax-deductible; consult a tax advisor.

The portion of a property's purchase price paid upfront by the buyer, not covered by the mortgage loan. A larger down payment reduces the loan amount, lowers the LTV ratio, often eliminates the need for private mortgage insurance (PMI), and can secure a better interest rate. Conventional loans typically require 3–20% down; FHA loans allow as little as 3.5%.

The portion of a property's value that you actually own — calculated as the current market value minus the outstanding loan balance. Equity grows as you make principal payments and as property values rise. Home equity can be accessed through a home equity loan, HELOC, or cash-out refinance. With an interest only loan, equity does not build through payments unless you voluntarily pay principal.

A neutral third-party account used to hold funds during a real estate transaction until all conditions are met. In the context of an ongoing mortgage, escrow accounts are used to collect and pay property taxes and homeowners insurance on the borrower's behalf. Lenders often require escrow accounts to ensure these obligations are met and the collateral property is protected.

A mortgage with an interest rate that remains constant for the entire loan term — whether 10, 15, 20, or 30 years. Monthly principal and interest payments never change, making budgeting predictable. Fixed-rate mortgages are typically the most popular choice for primary residences, especially when interest rates are low or when borrowers plan to stay in the home long-term.

The legal process by which a lender takes possession of a mortgaged property after the borrower fails to make required payments. Foreclosure timelines and processes vary significantly by state. A foreclosure severely damages the borrower's credit score and can remain on a credit report for up to seven years. Alternatives like loan modification, short sale, or deed-in-lieu may be available.

A loan where each scheduled payment covers both interest and a portion of the principal, so that the balance reaches exactly zero at the end of the loan term. This is the standard structure for conventional mortgages and most personal and auto loans. It contrasts with interest only loans, balloon loans, or negative amortization loans.

A credit check triggered when you formally apply for a loan or credit product. Hard inquiries are recorded on your credit report and can temporarily lower your credit score by a few points. Multiple mortgage-related hard inquiries within a 14–45 day window are typically treated as a single inquiry by scoring models, allowing rate shopping without repeated score damage.

The current market value of your home minus the outstanding balance on any loans secured by it. For example, if your home is worth $450,000 and you owe $280,000, your home equity is $170,000. Equity increases as you pay down the loan principal and as property values appreciate. It can be accessed via a home equity loan, HELOC, or cash-out refinance.

A revolving line of credit secured by your home equity, similar to a credit card with your home as collateral. You can draw from it as needed up to the credit limit during the draw period (usually 5–10 years), repaying only interest on what you use. After the draw period, repayment of principal and interest begins. HELOCs typically have variable interest rates.

The benchmark interest rate to which an adjustable-rate mortgage is tied. Common indexes include SOFR (Secured Overnight Financing Rate), the U.S. prime rate, and the 1-year Treasury rate. When the index rises or falls at an ARM's adjustment date, the mortgage rate adjusts accordingly (within any applicable caps). The borrower's rate equals the index plus a fixed margin.

The cost charged by a lender for borrowing money, expressed as a percentage of the outstanding loan balance. Interest is calculated on the remaining principal balance each period. In the early months of an amortizing loan, the majority of each payment goes toward interest rather than principal reduction — a pattern that reverses over time as the balance decreases.

A loan where the required monthly payment covers only the interest charge — not the principal — for a defined period, typically 5 to 10 years. The principal balance does not decrease unless the borrower makes voluntary extra payments. After the interest only period, the loan recasts and payments increase to fully amortize the remaining balance. Best suited to investors and borrowers with a clear exit strategy.

The annual percentage charged by a lender for the use of borrowed funds, applied to the outstanding principal balance. It is the base cost of borrowing before accounting for fees and other charges (see APR). Interest rates are influenced by the Federal Reserve's benchmark rate, the borrower's credit profile, loan type, loan term, and broader economic conditions.

A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac (above $766,550 in most U.S. areas for 2024). Because jumbo loans cannot be sold to these agencies, lenders assume more risk and typically charge higher interest rates, require higher credit scores (often 700+), larger down payments, and more extensive documentation. Interest only products are most commonly available in the jumbo category.

A penalty charge assessed by a lender when a borrower's payment is received after the due date, typically after a grace period of 10–15 days. Late fees are usually a fixed dollar amount or a percentage of the overdue payment (commonly 3–6% of the payment). Repeated late payments are also reported to credit bureaus and can significantly damage your credit score.

A legal claim or right against a property used as collateral for a debt. When you take out a mortgage, the lender places a lien on your property. The lien gives the lender the right to take possession of the property if you fail to repay the loan. A property's title should be free of unauthorised liens before a sale or refinance can be completed.

The ratio of the loan amount to the appraised value of the asset being financed, expressed as a percentage. LTV = (Loan Amount ÷ Appraised Value) × 100. An LTV of 80% or below is generally preferred by conventional lenders to avoid requiring private mortgage insurance. Higher LTV means more lender risk, which typically results in a higher interest rate.

A fee charged by a lender for processing and underwriting a new loan, typically expressed as a percentage of the loan amount (usually 0.5%–1%). Origination fees cover the lender's administrative costs and are part of the closing costs paid at settlement. They are included in the APR calculation and can sometimes be negotiated or offset by accepting a slightly higher interest rate.

In an adjustable-rate mortgage, the margin is the fixed percentage added to the index rate to determine the borrower's actual interest rate at each adjustment. For example, if the index is 4.5% and the margin is 2.5%, the adjusted rate would be 7.0%. The margin is set at loan origination and remains constant for the life of the loan; only the index changes.

The date on which a loan's final payment is due and the debt is fully repaid. A 30-year mortgage originated in 2024 has a maturity date in 2054. If a loan is refinanced or paid off early, it matures before its original scheduled date. Some loans, particularly balloon loans, require a large lump-sum payment at maturity.

A loan used to purchase or refinance real estate, in which the property itself serves as collateral. The borrower receives funds from a lender and agrees to repay the loan — plus interest — over a set term, typically 15 or 30 years. Failure to repay can result in foreclosure. Mortgages are the largest financial commitment most people ever make.

Insurance that protects the lender — not the borrower — in the event of default. Private Mortgage Insurance (PMI) is typically required on conventional loans with an LTV above 80% (down payment below 20%). FHA loans require a Mortgage Insurance Premium (MIP) regardless of down payment. PMI can usually be cancelled once LTV reaches 80%.

A situation where a loan's balance increases over time because the required payments do not cover the full interest charge. The unpaid interest is added to the principal balance, causing it to grow even as payments are made. Negative amortization was common in some option ARM products before 2008 and is now heavily regulated. It significantly increases total interest cost.

A mortgage that does not meet the Consumer Financial Protection Bureau's (CFPB) definition of a "Qualified Mortgage" — typically because it does not meet standard income documentation, DTI, or product requirements. Non-QM loans include interest only mortgages, bank statement loans for self-employed borrowers, and certain jumbo products. They carry higher rates to compensate lenders for taking on additional regulatory and credit risk.

The process by which a lender evaluates, approves, and funds a new loan. Origination includes the application, credit check, income and asset verification, appraisal, underwriting, and closing stages. The origination fee compensates the lender for this work. The length of the origination process varies — typically 30–60 days for a mortgage.

Fees paid to a lender at closing, where one point equals 1% of the loan amount. Discount points are paid to buy down the interest rate. Origination points are a form of origination fee. Some lenders also offer "negative points" (lender credits) where they pay some closing costs in exchange for a higher interest rate. Whether paying points makes sense depends on how long you keep the loan.

A lender's conditional commitment to provide a loan up to a specified amount, based on a review of your credit, income, assets, and debts. Pre-approval is stronger than pre-qualification (which is based only on self-reported information) because it involves a hard credit inquiry and documented verification. Sellers and real estate agents take pre-approved buyers more seriously.

A fee charged by some lenders if a borrower pays off the loan or makes extra large principal payments before a specified period has elapsed. Prepayment penalties are designed to protect lenders from early loan payoffs that reduce their expected interest income. They are less common than they once were; most conventional mortgages in the U.S. do not carry them, but always check your loan documents.

The original amount of money borrowed, or the remaining outstanding balance owed on a loan — not including interest. Each loan payment covers some interest and some principal (on amortizing loans). As principal is paid down, the interest charged each period decreases. Making extra principal payments above the required amount is one of the most effective ways to reduce the total cost of a loan.

Insurance required by conventional lenders when a borrower's down payment is less than 20% of the purchase price (LTV above 80%). PMI protects the lender if the borrower defaults, and the cost is paid by the borrower — typically 0.2%–2% of the loan amount per year. PMI can be cancelled once the LTV ratio reaches 80%, either through principal payments or home appreciation.

A category of mortgage defined by the CFPB that meets specific requirements designed to ensure borrowers can repay the loan. QM rules prohibit certain risky features such as negative amortization, balloon payments (with limited exceptions), interest only periods, and loan terms exceeding 30 years. Lenders receive legal protection from borrower lawsuits when they originate QM loans.

The recalculation of a loan's monthly payment that occurs at the end of an interest only period or when a significant extra principal payment is made. At recast, the remaining principal balance is re-amortized over the remaining loan term, producing a new — and usually higher — monthly payment. Borrowers with interest only loans should plan carefully for this payment increase.

Replacing an existing loan with a new one — usually to obtain a lower interest rate, reduce monthly payments, change the loan term, switch from adjustable to fixed rate, or access home equity (cash-out refinance). Refinancing involves paying closing costs (typically 2–5% of the loan amount), so it is most beneficial when the interest savings over time exceed those upfront costs.

Liquid assets a borrower has available after closing — not used for the down payment or closing costs. Lenders often require borrowers to have reserves equal to 2–12 months of mortgage payments, depending on the loan type and risk profile. Reserves demonstrate financial stability and the ability to continue making payments if income is temporarily disrupted.

A loan backed by an asset (collateral) that the lender can seize if the borrower defaults. Mortgages (secured by real estate) and auto loans (secured by the vehicle) are the most common types. Because the lender's risk is lower, secured loans generally carry lower interest rates than unsecured loans. The borrower risks losing the collateral asset in the event of non-payment.

Interest calculated only on the outstanding principal balance, not on previously accumulated interest. The formula is: Interest = Principal × Rate × Time. Most standard mortgages and personal loans use simple interest calculated on the remaining balance each period. This contrasts with compound interest, where interest is calculated on both principal and prior accumulated interest.

The length of time over which a loan is scheduled to be repaid in full. Common mortgage terms are 15, 20, and 30 years. Shorter terms result in higher monthly payments but significantly less total interest paid over the life of the loan. Longer terms offer lower monthly payments but cost more in total interest. The loan term affects both affordability and total cost.

Insurance that protects against financial loss from defects in a property's title — such as unpaid liens, errors in public records, boundary disputes, or undisclosed heirs. Lenders require lenders' title insurance as a condition of most mortgages; owners' title insurance (which protects the buyer) is optional but strongly recommended. It is typically a one-time premium paid at closing.

The lender's process of evaluating the risk of approving a loan application. Underwriters review credit scores, income documentation, employment history, assets, debts, the property appraisal, and the overall loan structure. Underwriting results in approval, approval with conditions (e.g. additional documentation required), or denial. It is the final verification stage before loan closing.

A loan not backed by collateral, approved based solely on the borrower's creditworthiness, income, and financial history. Personal loans and credit cards are the most common types. Because lenders cannot seize an asset if the borrower defaults, unsecured loans carry higher interest rates than comparable secured loans. A strong credit score is particularly important for obtaining favourable unsecured loan terms.

An interest rate that changes periodically based on fluctuations in an underlying benchmark index. Variable rates are used in adjustable-rate mortgages, HELOCs, and many personal and business loans. They typically start lower than fixed rates, but the borrower assumes the risk that rates — and therefore payments — may increase over time. Rate caps limit how much a variable rate can change.

A mortgage that requires no down payment from the borrower. The most common examples are VA loans (available to eligible U.S. military veterans and service members) and USDA loans (for eligible rural properties). Zero-down loans allow buyers to purchase without saving for a down payment, but they result in a higher loan balance, higher monthly payments, and often higher mortgage insurance costs.