A few things to know to make the hunt for a mortgage as easy and personal as possible.

Lingo & Pointers

An adjustable-rate mortgage (ARM) has an interest rate that changes throughout the life of the loan. The initial interest rate is fixed for a set period of time, typically at a lower rate than a fixed-rate mortgage. After that, the interest rate resets periodically—rising or falling in reaction to the market.

Adjustable-rate mortgage (ARM)

The annual percentage rate (APR) is the yearly cost of a loan to the borrower. It reflects your interest rate plus any related charges and fees, such as closing costs, homeowners insurance, and discount points.

Annual percentage rate (APR)

An appraisal is a property valuation made by an unbiased, licensed third party with no connection to the seller. Appraisals are based on a number of factors, including a property’s location, condition, and age.

Appraisal

Basis points, or BPs (pronounced “bips”) are a unit of measurement equal to 0.01%. BPs are commonly used to describe changes in interest rates. For example, if a mortgage’s rate goes from 3.14% to 3.27%, you could say it went up by 13 BPs.

Basis points (BPs)

During a cash-out refinance, you can take out a new mortgage for more than you owe on your existing one, then convert home equity into cash.

Cash-out refinance

Closing costs are the processing fees paid to a lender to complete a real estate transaction. For example, your closing costs might cover expenses like credit report fees, attorney fees, appraisal fees, and title insurance.

Closing costs

A closing disclosure (CD) is a document from the lender that outlines the loan terms, projected monthly payments, fees, and other closing costs. Lenders are required to give you the CD at least three business days before you close on the mortgage loan—this way, you can ask any questions prior to making a payment.

Closing disclosure (CD)

A co-applicant is someone who applies for a loan alongside the primary borrower. Adding a co-applicant is a popular option for individuals who wouldn’t qualify for a mortgage on their own.

Co-applicant

A co-borrower is someone who shares the legal responsibility of repaying your loan. This is most commonly a spouse or partner, though it could also be a friend or family member.

Co-borrower

Collateral is a property or other asset that a lender accepts as security for a loan. For a mortgage, the collateral is typically the home itself. If you fail to pay your lender as agreed upon, they can repossess or claim ownership to the collateral.

Collateral

A condo is a privately owned unit within a large property complex. Owners typically contribute monthly homeowners association (HOA) fees to maintain common areas such as lobbies, elevators, swimming pools, laundry rooms, and exercise facilities.

Condominium (condo)

To qualify as a conforming loan, a home loan must meet the mortgage limits set by Fannie Mae and Freddie Mac. In contrast, mortgages that exceed the conforming loan limit are known as nonconforming or jumbo mortgages.

Conforming loan

A contingency is a condition in the purchase contract that must be met in order for the closing to occur. For example, a home sale might be voided if the buyer can’t secure a loan in an agreed upon timeframe.

Contingency

A conventional mortgage is a type of home loan that’s backed by a private lender rather than a government agency.

Conventional mortgage

A cooperative (commonly known as a co-op) is a multi-unit development owned by a corporation of residents. Rather than buying a unit outright, owners purchase shares in the building—thereby becoming shareholders in the overall corporation.

Cooperative/co-op

During a credit check, a lender will look into your financial history with credit reporting agencies to determine your creditworthiness.

Credit check

Your credit score is a three-digit number that ranges from 300 to 850, based on your credit risk. Higher credit scores can inspire confidence in potential lenders, as they indicate a history of consistently paying bills on time.

Credit score

Credits are the inverse of points. In accepting credits from a lender, you can get lower closing costs in exchange for a higher interest rate.

Credits

A down payment is the percentage of your home’s price that you pay up front during closing. In general, buyers who put down less than 20% will be required to pay private mortgage insurance (PMI) in addition to their monthly payment.

Down payment

Earnest money is a good-faith deposit made to the seller, representing a home buyer’s intent to purchase. Once deposited, these funds are typically held in a third-party escrow account until closing—at which point, they’re applied toward the buyer’s down payment and closing costs.

Earnest money

Equity is the difference between the amount you owe on your mortgage and what your home is currently worth. For example, if you owe $200,000 on your mortgage for a home valued at $600,000, you have $400,000 in equity.

Equity

Escrow is a third-party account that temporarily holds large sums of money until a particular condition has been met. For example, escrow accounts may be used to hold the buyer’s deposits while a real estate transaction is processing.

Escrow

Federal National Mortgage Association (Fannie Mae, for short) is a leading source of mortgage financing in the United States. As a government-sponsored enterprise, they buy and guarantee mortgages through the secondary mortgage market—thereby creating liquidity for lenders.

Fannie Mae

Federal Housing Administration (FHA) loans are government-backed loans known for their affordability. This can be an attractive option for first-time homebuyers without a substantial credit history, since you only need a minimum credit score of 500 and a 3.5% down payment to qualify for a FHA loan.

Federal Housing Administration (FHA) loans

FICO scores are a measure of creditworthiness generated by the Fair Isaac Corporation. Based on information collected by three national credit reporting agencies (Experian, Equifax, and TransUnion), these scores range from 300 to 850, with a higher score indicating a better history of paying bills on time.

FICO score

A fixed-rate mortgage is a loan that has an unchanging interest rate throughout its entire term, thereby providing homeowners with predictable monthly payments.

Fixed-rate mortgage

The Federal Home Loan Mortgage Corporation (nicknamed Freddie Mac) is a government-sponsored enterprise that ensures affordable housing options for low-income homebuyers, sellers, and renters.

Freddie Mac

A home inspection gives buyers one last chance to uncover problems with a property before closing. During the inspection, a licensed professional evaluates things like a home’s foundation, structure, roof, plumbing, and electrical systems, then provides a written report with results.

Home inspection

Commonly seen in condos, co-ops, and residential neighborhoods, homeowners associations (HOAs) regularly enforce rules and regulations to keep communities clean and cohesive. They also oversee maintenance for shared spaces, like pools or exercise facilities. HOA fees can vary widely—for instance, a condo with 24/7 concierge service, free parking, and a rooftop deck will likely charge more than one without these amenities.

Homeowners association (HOA)

Homeowners insurance is a policy that helps repair or replace your home and its contents in the event of a disaster (e.g. fires, hurricanes, or burglaries). In order to protect their investments, most lenders require proof of a homeowners insurance policy prior to closing.

Homeowners insurance

An investment property is one that you purchase to make a profit rather than for your own personal use. It’s important to note that investment properties are not eligible for the same types of home loan rates as primary residences.

Investment property

True to their name, jumbo loans are a type of home loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Unlike a conventional mortgage, jumbo loans are not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.

Jumbo loan

A loan commitment is a letter issued by a lending institution that promises to lend a specific amount of money under set terms and conditions.

Loan commitment

Lenders are legally required to provide you with a loan estimate, or LE, within three days of receiving your application. This standardized three-page form outlines important information including the estimated interest rate, term, monthly payment, and closing cost associated with your home loan.

Loan estimate (LE)

The loan term is the period of time over which you’ll be repaying your loan. If your mortgage has a 30-year loan term, for instance, your payments will be spread out over that 30-year period.

Loan term

A loan-to-value (LTV) ratio is an equation that assesses the lending risk associated with a home loan. To get your LTV, divide the mortgage amount by your appraised property value. In general, a lower LTV means a greater likelihood of getting approved—and a lower interest rate. If your LTV ratio is higher than 0.8, lenders may require that you purchase private mortgage insurance (PMI) to offset the increased risk of default.

Loan-to-value (LTV)

Anyone taking out a loan from the Federal Housing Administration (FHA) is required to pay an upfront mortgage insurance premium (MIP). Since the FHA accepts lower credit scores than many conventional loans, the MIP is a form of protection against higher-risk borrowers who are more likely to default.

Mortgage insurance premium (MIP)

A mortgage note is a legal contract signed at closing that outlines the complete terms of your new home loan, including how much money you’re borrowing from the lender, what your interest rate is, the duration of the loan, payment due dates, and any applicable late fees or penalties.

Mortgage note

Origination fees are an upfront cost you pay a lender to process your home loan. Typically, this ranges anywhere from 0.5% to 1% of the entire loan amount.

Origination fee

When applying for a mortgage, the lender needs to know whether the borrower is going to be an owner-occupant (someone who lives in the home they own) or an absentee owner (someone who holds the property title, but lives elsewhere). This is an important distinction, since some types of loans are only available to owner-occupants and not to investors.

Owner-occupancy

Together, principal, interest, taxes, and insurance (PITI) make up your monthly home loan payment. On average, mortgage lenders prefer PITI to be 28% or less of the borrower's gross monthly income.

PITI

Planned unit developments (PUDs) are planned communities with mandatory homeowners association (HOA) membership and common amenities such as swimming pools, playgrounds, or tennis courts.

Planned unit development (PUD)

Mortgage points (also known as discount points) are fees that a buyer pays a lender at closing to lower the interest rate on their home loan. One mortgage point equals 1% of the mortgage amount.

Points

A pre-approval letter is a document from a lender indicating the type and amount of loan you can qualify for.

Pre-approval letter

Prepaid costs are upfront cash payments made at closing for homeowners insurance, property taxes, mortgage interest, and the initial escrow deposit. They’re called prepaid costs because you’re paying for them before their technical due date.

Prepaid costs

A prepayment penalty is a fee that some lenders charge when you pay off your mortgage early.

Prepayment penalty

Your primary residence is the place where you live for the majority of the year—whether that’s a single-family home, condo, co-op, RV, or even a houseboat. To qualify as a residence, your property must have permanently mounted sleeping, cooking, and bathroom facilities. When it comes to home loans, primary residences can qualify for a lower mortgage rate and income tax benefits.

Primary residence

The principal is the amount of money you borrowed from a lender to take out a home loan. For example, if a lender gave you $300,000, your principal is $300,000.

Principal

Private mortgage insurance (PMI) protects the lender in the event that a borrower defaults on their payments. Most lenders require PMI when a borrower puts down less than 20% on a conventional loan.

Private mortgage insurance (PMI)

A purchase contract is a legally binding agreement between buyer and seller that outlines the terms and conditions for the property sale.

Purchase contract

A mortgage rate lock is an agreement between a borrower and a lender that “locks in” a guaranteed interest rate for a set amount of time—thereby protecting the borrower from potential rises in interest rates during the lock period.

Rate lock

During the refinance process, a homeowner applies for a new home loan to replace an existing one. For example, you might refinance when interest rates drop in order to reduce your monthly mortgage payments.

Refinance

Mortgage reserves are savings balances that buyers have set aside for emergencies. To minimize risk, some lenders may require that you have a few months worth of mortgage payments on hand before closing.

Reserves

A secondary home is a property you own and occupy for only part of the year. For example, your primary residence might be a Brooklyn brownstone while your secondary home is a Cape Cod cottage that you escape to every summer. To qualify as a second home, a property must be suitable for year-round occupancy—and it can’t be a full-time rental or timeshare.

Secondary home

A real estate title is a legal document that records property ownership. The title is transferred from seller to buyer at closing to mark a change in ownership.

Title

Title insurance is built to protect homeowners from financial losses arising from defects in titles (for example, if an omitted heir argues that they’re the rightful property owner). It’s a one-time payment made at closing that can potentially save you thousands of dollars down the line.

Title insurance

Typically paid at closing, these are real estate taxes that facilitate the transfer of a property deed from seller to buyer.

Transfer taxes

During the underwriting process, your lender verifies your income, assets, debt, and property details in order to issue final approval for your loan.

Underwriting

Made available through a program established by the United States Department of Veterans Affairs, VA loans have favorable terms for active military service members, veterans, and eligible military spouses.

VA loans

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