The words lenders assume you already know.
A plain-English reference for every acronym, fee, and ratio that shows up in a mortgage conversation.
Amortization
The schedule that splits each payment between interest and principal.
- A fixed mortgage payment is divided every month between interest (paid to the lender on the remaining balance) and principal (which reduces what you owe). Early payments are mostly interest; later payments are mostly principal.
APR
Annual Percentage Rate — the loan's true yearly cost.
- APR includes the interest rate plus most lender fees (origination, points, mortgage insurance) expressed as an annual rate. Always compare loans by APR, not just the headline rate.
ARM
Adjustable-Rate Mortgage.
- A loan with a fixed interest rate for an initial period (commonly 5, 7, or 10 years), after which the rate adjusts periodically based on a market index plus a margin.
Basis Points (bps)
1/100th of a percent.
- Lenders quote rate changes in basis points. 25 bps = 0.25%. A rate moving from 6.75% to 7.00% rose by 25 basis points.
Cap Rate
An investment property's annual return as a percent of price.
- Net Operating Income ÷ purchase price. A quick yardstick for comparing rental properties before financing is layered in.
Cash-on-Cash Return
Annual cashflow ÷ cash you actually put in.
- Measures the return on the real money you invested (down payment + closing costs), not the full property value. Tells you how hard your dollars are working.
Closing Costs
One-time fees due at purchase, typically 2–5% of the loan.
- Includes lender origination, appraisal, title insurance, recording fees, and prepaid taxes and insurance. Often forgotten in budgeting — always add to the down payment.
DTI (Debt-to-Income)
The percent of gross income that goes to debt.
- Front-end DTI is housing payment ÷ income (ceiling: 28%). Back-end DTI is all debt ÷ income (ceiling: 36% traditional, 43% qualified mortgage, 50% on some programs).
Equity
Home value minus what you owe.
- Grows two ways: you pay down the loan (forced savings), and the home appreciates. Equity becomes accessible via sale, HELOC, or cash-out refinance.
Escrow
An account held by the lender for taxes and insurance.
- Your monthly payment includes 1/12 of your annual property tax and insurance. The lender holds the money and pays the bills when due, protecting their collateral.
FHA Loan
Government-backed loan with low down-payment requirements.
- Allows down payments as low as 3.5% with credit scores ≥ 580. Requires upfront and ongoing mortgage insurance premiums that, unlike PMI, often last the life of the loan.
HOA
Homeowner Association fees.
- Monthly or quarterly dues paid to a community association for shared amenities and maintenance. Common in condos and planned developments. Lenders include HOA in DTI.
LTV (Loan-to-Value)
Loan balance ÷ home value.
- An 80% LTV means you owe 80% of the home's value. PMI typically drops automatically at 78% LTV (original value) and can be requested at 80%.
Origination Fee
The lender's charge to process the loan.
- Usually 0.5%–1% of the loan amount. Negotiable. Some lenders waive it in exchange for a slightly higher rate.
PITI
Principal, Interest, Taxes, Insurance.
- The four components of a typical monthly mortgage payment. Lenders use PITI (often plus HOA and PMI) to compute your housing DTI.
PMI
Private Mortgage Insurance.
- Required when your down payment is under 20%. Protects the lender (not you) against default. Typically 0.3%–1.5% of the loan per year. Cancels automatically at 78% LTV.
Points
Upfront fees paid to lower the interest rate.
- One point = 1% of the loan amount paid at closing, typically reducing the rate by 0.25%. Worth it only if you'll hold the loan long enough to recoup the cost.
Principal
The amount you actually borrowed.
- Each payment chips a little off the principal; the rest is interest. Extra principal payments shorten the loan and reduce total interest dramatically.
Refinance
Replacing an existing mortgage with a new one.
- Used to lower the rate, shorten the term, change loan type, or pull out equity (cash-out refi). Comes with new closing costs — usually only worthwhile if the rate drop pays them back within a few years.
Underwriting
The lender's review of your finances before approval.
- The underwriter verifies income, debts, credit, assets, and the property's value to decide if the loan meets program guidelines.
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