Common Mortgage Terms Explained

Reviewing your loan estimate or closing disclosure can feel like reading a foreign language. Let's break down the most important terms you'll encounter during the mortgage process.

Loan Types & Products

Conventional Loans

• Conventional Loan: A mortgage not backed by a government agency
• Conforming Loan: A conventional loan that meets Fannie Mae and Freddie Mac's lending limits
• Jumbo Loan: A loan that exceeds conforming loan limits
• Portfolio Loan: A mortgage that lenders keep on their own books rather than selling
• Non-QM Loan: Loans that don't meet standard qualifying mortgage requirements

Government-Backed Loans

• FHA Loan: Insured by Federal Housing Administration, popular with first-time buyers
• VA Loan: For veterans and service members, backed by Department of Veterans Affairs
• USDA Loan: For rural properties, backed by Department of Agriculture
• Section 184 Loan: Specifically for Native American and Alaska Native homebuyers
• FHA 203(k) Loan: Combines home purchase and renovation costs into one loan

Common Loan Products

• 30-Year Fixed: Most common, payments spread over 30 years with fixed interest rate
• 15-Year Fixed: Higher payments but less total interest paid
• ARM (Adjustable Rate Mortgage): Rate changes after initial fixed period
  • 5/1 ARM: Fixed for 5 years, then adjusts annually
  • 7/6 ARM: Fixed for 7 years, then adjusts every 6 months
  • 10/1 ARM: Fixed for 10 years, then adjusts annually
  • 3/2/1 Buydown: Temporarily reduced interest rate for first three years

Key Financial Terms

Interest & Rates

• APR (Annual Percentage Rate): Total cost of borrowing expressed as yearly rate
• Interest Rate: The basic rate charged on your loan
• Rate Lock: Guarantee of interest rate for specific period
• Points: Fees paid to lower interest rate (1 point = 1% of loan amount)
• Float Down: Option to secure lower rate if rates drop during lock period
• SOFR: Secured Overnight Financing Rate, common ARM index
• Margin: Amount added to index rate on ARMs
• Caps: Limits on how much ARM rates can adjust
• Prime Rate: Base rate for many lending products

Costs & Fees

• Origination Fee: Charged by lender for processing loan
• Closing Costs: Total fees and expenses due at closing
• Escrow: Account holding funds for taxes and insurance
• PMI (Private Mortgage Insurance): Required for conventional loans with less than 20% down
• MIP (Mortgage Insurance Premium): FHA loan equivalent of PMI
• UFMIP: Upfront Mortgage Insurance Premium for FHA loans
• VA Funding Fee: One-time fee for VA loans
• Yield Spread Premium: Rebate paid to broker for higher rate loan
• Recording Fees: Government charges for recording deed and mortgage
• Transfer Tax: State/local tax on property transfers
• Prepaid Items: Upfront payments for taxes, insurance, interest
• Per Diem Interest: Daily interest charges between closing and first payment

Property-Related Terms

Valuation & Assessment

• Appraisal: Professional estimate of property value
• Assessment: Value assigned by local government for tax purposes
• Comps (Comparables): Similar properties used to determine value
• BPO (Broker Price Opinion): Less formal valuation by real estate agent
• Automated Valuation Model (AVM): Computer-generated property value estimate
• Cost Approach: Valuation based on replacement cost
• Income Approach: Valuation based on potential rental income
• Market Approach: Valuation based on recent comparable sales

Title & Ownership

• Title Insurance: Protects against ownership disputes
• Deed: Legal document proving ownership
• Lien: Legal claim against property
• Chain of Title: Historical record of property ownership
• Abstract of Title: Summary of property's title history
• Encumbrance: Claim or liability attached to property
• Easement: Right to use another's property
• Covenant: Restriction on property use
• Right of Way: Legal right to pass through property
• Encroachment: Structure that intrudes on another's property

Payment Components

PITI: Your Monthly Payment

• Principal: Amount paying toward loan balance
• Interest: Cost of borrowing money
• Taxes: Property taxes (often escrowed)
• Insurance: Homeowners insurance (often escrowed)
• HOA Dues: Homeowners Association fees (if applicable)
• Special Assessments: Additional fees for community improvements
• Flood Insurance: Required in flood zones
• Mortgage Insurance: PMI or MIP if applicable

Other Payment Terms

• Amortization: Schedule of loan payoff over time
• Prepayment Penalty: Fee for paying loan off early
• DTI (Debt-to-Income Ratio): Monthly debts divided by monthly income
• Front-End Ratio: Housing costs divided by income
• Back-End Ratio: All monthly debts divided by income
• Balloon Payment: Large final payment on some loans
• Biweekly Payments: Paying half payment every two weeks
• Principal Curtailment: Extra payment toward principal
• Acceleration Clause: Right to demand full payment
• Grace Period: Time after due date before late fee

Closing Disclosure Specific Terms

Key Sections

• Loan Terms: Final loan amount, interest rate, and payment details
• Projected Payments: Payment breakdown over loan term
• Cash to Close: Total amount needed at closing
• Summaries of Transactions: Detailed breakdown of all costs
• Loan Calculations: APR, finance charge, amount financed
• Loan Disclosures: Important loan features and requirements
• Contact Information: Details for all involved parties
• Other Disclosures: Additional required legal notices
• Confirm Receipt: Acknowledgment of document receipt

Important Dates & Deadlines

• Closing Date: When you sign final paperwork and officially become the owner
• Disbursement Date: When loan funds are distributed to seller and other parties
• Rate Lock Expiration: When your guaranteed interest rate expires - crucial to close before this
• First Payment Due: Usually first day of second month after closing (e.g. close in March, first payment May 1st)
• Maturity Date: When loan must be fully repaid (e.g. 30 years from closing)
• Right of Rescission: 3-day period to cancel refinance loans (does not apply to purchase loans)
• Inspection Contingency: Deadline to complete home inspections and request repairs
• Appraisal Contingency: Deadline to complete appraisal and negotiate if value is low
• Insurance Deadline: When you must show proof of homeowner's insurance

Understanding Your Rights & Protections

Key Consumer Protections

• TRID Rules: Requires lenders to provide Loan Estimate within 3 days of application and Closing Disclosure 3 days before closing
• Right of Rescission: 3-day period to cancel refinance loans at no cost
• Qualified Mortgage Rules: Prohibits risky loan features and requires lenders to verify you can repay
• Equal Opportunity: ECOA prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or public assistance
• RESPA Protections:
  • Requires detailed disclosures about costs
  • Prohibits kickbacks between service providers
  • Regulates escrow accounts
  • Requires timely responses to borrower inquiries
• Fair Credit Rights: FCRA lets you dispute credit report errors and requires lender to tell you if credit score affected loan terms
• Predatory Lending Protection: UDAAP rules prohibit unfair, deceptive or abusive practices by lenders

Red Flags to Watch For

• Pressure to skip reading documents
• Rush to close before rate lock expires
• Unexplained fee increases from Loan Estimate
• Required use of specific title/settlement companies
• Verbal promises not in writing
• Fees for basic information or answers

Remember: You have the right to:

• Ask questions until you understand everything
• Have all fees explained clearly
• Shop around for services
• Walk away if something feels wrong
• File complaints with CFPB if rights are violated

Want to make sure you're not overpaying on your mortgage? Visit Closing.wtf to analyze your loan estimate or closing disclosure.