Mortgage Terms

Expand Your Knowledge of Commonly Used Mortgage Terms

The mortgage lending industry can be confusing for those not well versed in mortgage terminology. From terms like balloon payment to settlement costs, the average person can get easily get lost in the industry jargon. Mortgage professionals speak a language of their own. 

We’ve come up with a list of some of the most commonly used mortgage terms to take the confusion out of the mortgage lending process. Our mortgage definitions use plain language that anyone can understand. 

Additional Principal Payment

Another term for additional principal payment is a principal-only mortgage payment. It’s a supplement payment directly applied to your mortgage loan principal amount. Since it exceeds what you owe each month on your mortgage, an additional principal payment can help you pay off your mortgage early and save you on interest.


Amortization refers to paying off your loan by making consistent monthly payments. For example, you might have a fixed-rate mortgage for 30 years. Amortization means you’ll make the same payment each month for 30 years.

Amortization Term

Amortization term means how long it’ll take you to repay your mortgage loan. The term is the length of time you agreed to make regular mortgage payments. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

Annual Percentage Rate (APR)

The annual percentage rate (APR) broadly measures the cost of borrowing money than your mortgage interest rate. The APR includes multiple items, such as mortgage broker fees, interest rates, and other charges you incur when you get a mortgage. Because of those factors, your APR is typically higher than your mortgage interest rate.


An appraisal is required by the loan company to determine the value of the property. The appraiser will determine what the fair market value of the home is. The appraisal value also helps determine how much you pay in property taxes. 

Appraised Value

The appraised value is how much the property is valued by the appraiser. The appraised value is an important part of the mortgage loan underwriting process. It determines how much money you can borrow and your mortgage terms.

Balloon Mortgage

With a balloon mortgage, you’ll have an initial period where you have zero or low monthly payments. At the end of a balloon mortgage, the borrower must pay off the loan in a large lump sum. Your monthly payments will typically only be toward your interest rate.

Balloon Payment

The balloon payment is the final, large payment due when a balloon mortgage loan ends. A balloon mortgage payment tends to be twice the amount of the previous payments. Most homeowners tend to refinance their homes before they make their balloon payments.

Certificate of Eligibility

A certificate of eligibility is a requirement for those wanted to get a Department of Veteran’s Affairs (VA) mortgage. The federally-issued document states that you’ve met the eligibility requirements for a VA loan. A buyer still needs to apply for a VA loan through a lender and meet their requirements, such as income and credit score.


A mortgage closing is a final step in the homebuying process. It’s also referred to as “settlement.” It’s when the buyer signs all of the closing documents and pays the closing costs. 

Closing Cost

Closings costs are the fees outside of what the buyer pays for the property to complete the transaction. These fees can include property taxes, origination fees, appraisal fees, and more. The amount a buyer and seller pay in closing costs varies depending upon the mortgage lender and where you live.


As part of the mortgage loan approval process, lenders typically ask for collateral, which is property (such as securities or the home itself) pledged by a borrower to protect the interests of the lender.

Debt-to-Income (DTI) Ratio

The debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments, such as a mortgage, and is used by lenders to determine your borrowing risk. For example, a low DTI ratio demonstrates a good balance between your debt and income.

DTI Ratio Calculator


A mortgage default is when the borrower fails to make their monthly mortgage payments. A default can also refer to a homeowner making a reduced payment on their loan instead of the agreed-upon amount. The lender can take legal action if a borrower doesn’t make your mortgage payment. 


Delinquency refers to when a borrower is behind on their payments. Once a borrower is delinquent for a certain period, typically nine months, the lender will say the loan is in default. The borrower might be required to make the remaining balance in full.

Down Payment

A mortgage down payment is a percentage of the property’s purchase price. A buyer pays this amount upfront when they close on their mortgage. They’ll then obtain a loan for the remaining home’s purchase price.


A mortgage down payment is a percentage of the property’s purchase price. A buyer pays this amount upfront when they close on their mortgage. They’ll then obtain a loan for the remaining home’s purchase price.


An escrow is an account held by a neutral third party during the homebuying process. All funds are deposited into this account and managed by a third party. The process continues until the fulfillment of the contract is fulfilled or the completed transaction.

Escrow Payment

An escrow payment is a portion of your mortgage payment held by the loan servicer to pay for various things, such as property taxes and mortgage insurance. Each month, the lender will deposit the escrow portion of a borrower’s loan payment into the escrow account. They’ll then make those payments on the borrower’s behalf.

FICO Score

A FICO score is a person’s credit score calculated using software from Fair Isaac Corporation (FICO). The score determines a borrower’s creditworthiness. A mortgage lender will use the score to determine how much credit they can offer the borrower and the interest rate.


Interest is essentially a fee a lender charges to the borrower so they can borrow money to purchase a home. Interest rates can be fixed or variable, meaning they can change over time. A lender calculates the interest a borrower owes based on the total amount of money lent.

Late Charge

A borrower incurs a late fee if they fail to make an on-time mortgage payment. Borrowers have a grace period of around 15 days after their mortgage is due to make their payment. If they don’t make their payment within the allotted time frame, they might encounter a late fee of 3-6% of their monthly payment.

Loan-to-Value (LTV) Ratio

The loan-to-value (LTV) ratio measures how much the principal amount of the mortgage is versus the appraised value of the home. The larger the down payment, the smaller your LTV percentage will be. Lenders will look at your LTV ratio when determining if a borrower has to make private mortgage insurance payments.

LTV Ratio Calculator


A note is a legal document that is a description of your mortgage. It states how the borrower will repay their loan, using your home as collateral. The note is signed during the closing document by the borrower.

Origination Fee

A lender charges the borrower an origination fee for creating the mortgage loan. This fee could include various costs for funding the loan, processing the application, and more. 


Mortgage points are fees that a borrower pays a lender to lower their interest rate when refinancing or purchasing a home. For example, one point equates to 1% of your mortgage loan amount. 

Principal Balance

A mortgage’s principal balance is the amount a borrower has left to pay on their loan. It excludes any interest and any other feeds. 

Principal, Interest, Taxes, and Insurance (PITI)

Principal, Interest, Taxes, and Insurance (PITI) refers to the various components that make up your mortgage payment. Mortgage lenders will determine a borrower’s PITI payment before evaluating if they qualify for a mortgage. 

Priority Approval

Another term for priority approval is pre-approval. Potential homebuyers will get pre-approved for a home loan by a lender before starting the home search process. The pre-approval can determine how much money they can borrow before applying for a home loan.

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a requirement for conventional mortgage borrowers who make a low down payment. PMI protects lenders if the borrower stops making their mortgage payments. PMI is typically around 0.5-1% of the mortgage amount each year.

Qualifying Ratios

Mortgage lenders use qualifying ratios to qualify a borrower for a home loan. The qualification ratio will determine if the borrower can repay the loan.

Rate Lock

A mortgage rate lock means that the borrower’s interest rate won’t change when they make an offer on a home and closing. Rate locks typically require the mortgage to close within a time frame. If interest rates go up during that time, the borrower can still keep their lower interest rate.


Home transactions are public records. Recording refers to when a borrower’s mortgage and/or deed gets filed with the county. The document gets time and date stamped, and uploaded into the county’s public system. 


When you refinance your home, you take out a new loan to replace your old one. The application process is the same as purchasing a home. Homeowners choose to refinance their homes to reduce their interest rates, consolidate their debt, or make a large purchase. 


A loan servicer is a company that collects payments from the borrower and manages their escrow accounts. The servicer is typically responsible for responding to borrower inquiries, processing their loan payments, and initiating foreclosure when needed. 


Mortgage underwriting is when a borrower’s assets, income, debt, and property get verified during the final mortgage approval stages. An underwriter is a mortgage expert who looks at a borrower’s finances to determine how much of a risk they are.

For more information on mortgage phrases and terms, you can explore FHA Terminology

Our mortgage professionals are here to help you through the mortgage process. Contact us today to get connected with a mortgage specialist.

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