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28 Mortgage Terms, Explained

28 Mortgage Terms, Explained; One glance at a mortgage guide and first-time homebuyers may think they’re reading another language.
Emma Diehl
Emma DiehlUpdated July 13, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
One glance at a mortgage guide and first-time homebuyers may think they’re reading another language. The jargon-heavy documents don’t lend themselves to newcomers, but by understanding a few terms, you’ll be well on your way to mastering the homebuying process.Learn 28 common mortgage terms and what they mean.

Adjustable-Rate Mortgage, or ARM

With an ARM, a borrower’s interest rate changes over time. In many cases, an ARM will have the same rate for a specified period, typically three, five, seven, or 10 years. (A 5/1 ARM means the introductory rate lasts for five years, and then the rate can change once a year.) Three kinds of caps control how the interest rate can adjust.


Amortization refers to the paying off of debt, including principal and interest payments. In the mortgage world, borrowers will receive an amortization schedule from their lender, which calculates standardized mortgage payments over the loan’s life, balancing principal payment with interest. (If you have a 30-year fixed-rate mortgage, your payments will remain the same for 30 years, given no change in your property tax or insurance rates, but your first payment will go primarily toward interest, and your last payment will go primarily toward the principal.)

Annual Percentage Rate, or APR

APR is sometimes used interchangeably with “interest rate,” but they are not the same thing. APR includes origination fees, application fees, processing fees, discount points, and other lender charges. Lenders are legally obligated to include APR on mortgage agreements, and this percentage can provide a more comprehensive financial picture than the interest rate alone. 


An appraisal is required by a lender in the mortgage application process. A professional comes to the home and determines a fair value based on size, condition, and the local market. Appraisals are not the same as inspections.


An asset refers to anything a person owns that has financial value. An asset can be investments in the market, collectibles, residential property, and more. 

Closing Costs

Closing costs include fees, services, and insurance paid by the buyer at closing. Typically, homebuyers can expect closing costs of 2% to 5% of the loan’s principal. 


Unlike a co-signer, a co-borrower will become a co-owner on a mortgage. A co-borrower will own half the property and is equally responsible for paying back a loan.

Conventional Loans

Conventional loans are home loans insured by private lenders, not the government, and are the most common type of mortgage.

Credit Score

A credit score is between 300 and 850 and helps determine a person’s eligibility for a mortgage. Credit scores consider a person’s financial history, including on-time payments, credit inquiries, how much you could borrow from all accounts vs. how much you are borrowing, and more. 

Debt-to-Income Ratio

Calculating DTI helps lenders determine a borrower’s eligibility for a mortgage. DTI = monthly debts / gross monthly income. The federal Consumer Financial Protection Bureau suggests that homeowners maintain a DTI ratio of 36% or less.


A deed is not a title. The document transfers the title, or legal ownership of a property, from one person to another. 

Discount Points

You can lower your mortgage interest rate in exchange for paying for an upfront fee, known as discount points. Each point equals 1% of the loan amount. Points increase closing costs but lower the interest rate for the mortgage overall.  

Down Payment

A down payment is an amount of money a buyer pays upfront to purchase a home. Traditional advice dictates a buyer puts 20% down, but the average down payment is much smaller.  

Earnest Money Deposit

An earnest money deposit is a way for buyers to indicate their commitment to purchasing a particular property. With their offer, buyers can include “earnest money,” which is cash upfront, usually around 1% of the offer price, that’s held in escrow. An earnest money deposit shows that a buyer is serious because, in many instances, the buyer can’t get that deposit back if the deal falls through. It can help a buyer appear more competitive in a multiple-offer scenario.   


Equity is not a home’s total value; it’s the value that the homeowner owns. A simple way to calculate equity is to subtract a home’s outstanding mortgage from its fair market value. The difference is the amount of the property owned free and clear.  


Simply put, escrow is the middleman, holding an asset between two parties before the deal is finalized. In the world of mortgages, there are two types of escrow: 
  • In the homebuying process, the buyer places their earnest money deposit, plus other documentation and fees, into an escrow account, paid to the seller at closing.
  • A homeowner may have an escrow account as well. A lender may require a borrower to pay a portion of their annual property taxes and insurance monthly into an escrow account. The lender disburses the payments at the appropriate time.  

Fannie Mae/Freddie Mac

Congress created both Fannie Mae and Freddie Mac. Both institutions buy mortgages from lenders and then hold or sell the mortgages in packages. By purchasing mortgages and guaranteeing they’ll be paid on time, these entities help make mortgages more available and affordable


The Federal Housing Administration offers affordable mortgages through the government to borrowers who qualify. The FHA has various home loan programs, including those for first-time buyers, seniors, and other groups. 

Fixed-Rate Mortgage

A fixed-rate mortgage has the same interest rate over the life of the loan.


A foreclosure occurs when a homeowner stops making payments on the property for an extended period, defaults on the mortgage, and loses the right to the property.

Home Inspection

Part of the homebuying process, a home inspection is conducted by a professional to check on the property’s condition and safety. The inspector will inventory the HVAC system, plumbing, and electrical work. Typically, the home inspection concludes with a report to the buyer detailing issues and potential hazards on a property.

Homeowners Insurance

Homeowners insurance protects buyers from covering the cost of damage to their home, including theft and many natural disasters. Most lenders require a borrower to have homeowners insurance to qualify for a mortgage.  

Interest Rate

The interest rate is what a lender charges a borrower for the use of its money. Interest is a percentage of the principal. A borrower’s credit score and financial history determine the rate offered. APR and interest are not always the same.

Origination Fee

An origination fee is a one-time fee created by the lender. The payment is typically due when the loan closes and is meant to cover the cost of processing and closing a loan.  The origination fee may be a flat rate or a percentage of the loan and varies from lender to lender. 


When lenders grant preapproval, it’s typically a letter that guarantees homebuyers that they can borrow a certain amount of money for a mortgage at a specific rate. A preapproval letter can show sellers that a buyer is serious about purchasing a property.   


The principal is the value of the mortgage. Every month, borrowers make mortgage payments to pay down the principal and interest on their loan.

Private Mortgage Insurance, or PMI

Borrowers who take out a conventional loan and make a down payment of less than 20% will be required to pay PMI. PMI protects the lender in the event the borrower defaults on the loan. The cost of PMI is typically 0.58% to 1.86% of the annual mortgage amount, and the borrower can pay it monthly or upfront. Once a buyer has 20% equity in their home, they can ask to have PMI removed. 


A title is a legal document that shows a person owns property or other assets. Deeds transfer property titles between buyer and seller.

The Takeaway

Do you know your points from your PMI, your Fannie Mae from your FHA? The mortgage world is studded with novel words and phrases that every homebuyer should know.The language of mortgages may be tricky, but the process of obtaining one doesn’t have to be.Lantern by SoFi helps buyers compare mortgage lenders and rates in a few clicks—taking the guesswork out of what lender is right for you.

About the Author

Emma Diehl

Emma Diehl

Emma Diehl is a nationally-published journalist with expertise in finance, real estate, and technology. Her work has appeared on NPR, The Huffington Post,, and numerous local publications. When she's not covering the world of personal finance with SoFi, she's probably rollerblading or planning her next meal.
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