Mortgage Terms, Explained

Glossary of Mortgage Terms

When it comes to mortgages, there are many perplexing terms and abbreviations that can confuse people simply trying to buy their first home. Here is a list of some of those terms that you may not be familiar with but will need to be when buying a home.


Adjustable Rate Mortgage (ARM) – An adjustable mortgage loan is a fixed rate for the first few years then it can change every 6 months after that over the course of the loan. Your principal and interest payments can also vary as the rate changes.

Closing Costs – Closing costs are expenses associated with completing the purchase of the house.

Down Payment – The down payment is the initial payment the borrower puts toward the house.

Equity – Equity is the difference between the value of the home and the mortgage loan. This typically increases over time as the amount of the loan decreases.

FICO (Fair Isaac and Co.) – FICO is the major credit scoring model used to assess the risk of the borrower.

Fixed Rate Mortgage – A Fixed Rate Mortgage will have the same interest rate every month meaning your principal and interest payment will never vary.

Interest Rate – Interest rate is the annual percentage of the loan that is charged to the borrower.

Jumbo Loan – A jumbo loan is a loan of more than $726,201.

Loan-to-Value (LTV) Ratio – The LTV Ratio is the amount loaned for a mortgage divided by the value of the home.

Pre-approval – Pre-approval is the lender telling the borrower how much money they may borrow and under what terms.

Principal – Principal is the amount of money borrowed for the mortgage. This decreases as payments are made.

Refinancing – Refinancing is contractually changing the terms and rates of your mortgage loan.

Reserves – Reserves are the amount of liquid assets a borrower has on-hand after paying the down payment and closing costs

Risk – Risk is the likelihood of the borrower being able to make timely payments on the loan.