Mortgage Glossary

Plain-English definitions with common ranges and examples.

Amortization

Paying off a loan over time through scheduled payments that include interest and principal.

Example: A 30-year mortgage amortizes over 360 monthly payments.

APR (Annual Percentage Rate)

A broader measure of borrowing cost than the interest rate. It may include certain lender fees.

Common: APR is often slightly higher than the note rate.

ARM (Adjustable-Rate Mortgage)

A mortgage with an initial fixed-rate period, then the rate can change based on an index + margin.

Example: A 5/1 ARM is fixed for 5 years, then adjusts yearly.

ARM Caps (initial / periodic / lifetime)

Limits on how much an ARM interest rate can change at the first reset (initial), each later reset (periodic), and overall (lifetime).

Example: 2/2/5 means max +2% first reset, +2% each later reset, +5% lifetime.

Down Payment

The upfront amount paid toward the home price. Lower down payments may increase monthly cost and require PMI.

Common: Common: 3%–20%+

Example: 20% down on $750,000 = $150,000.

DTI (Debt-to-Income)

Monthly debt payments divided by gross monthly income. Lenders use it to assess affordability.

Common: Many lenders prefer lower DTI; thresholds vary.

Escrow

An account managed by your mortgage servicer to pay property taxes and insurance on your behalf. Funded via your monthly payment.

Example: You pay 1/12 of estimated annual taxes and insurance each month into escrow.

Fixed-Rate Mortgage

A loan with an interest rate that remains constant for the full term.

Example: A 30-year fixed keeps the same rate for 30 years.

HOA (Homeowners Association dues)

Monthly/annual fees for shared building or community expenses (common in condos).

Common: Can range from $0 to $800+/month depending on property.

Index (ARM)

A reference interest rate used for ARMs. The lender adds a margin to the index to determine your target rate.

Example: Target rate = index + margin.

Interest Rate

The rate charged for borrowing money. Used to calculate the interest portion of each payment.

LTV (Loan-to-Value)

Loan amount divided by home value. Higher LTV often implies higher risk and may require PMI or a higher rate.

Example: A $600k loan on a $750k home is 80% LTV.

Margin (ARM)

A fixed percentage added to the index rate to compute the target ARM rate.

Common: Often 2.0%–3.5%

P&I (Principal & Interest)

The base mortgage payment excluding property taxes, insurance, HOA, and PMI.

PMI (Private Mortgage Insurance)

Insurance that protects the lender. Often required for conventional loans when down payment is below ~20%.

Common: Common: 0.2%–1.5% of loan per year (varies by borrower and lender).

Points

Optional upfront fees paid to reduce your interest rate. 1 point typically equals 1% of the loan amount.

Example: 1 point on a $600,000 loan = $6,000.

Principal

The amount borrowed (or remaining balance). The principal portion of each payment reduces the balance.

Property Taxes

Taxes assessed by local governments. Often paid through escrow. Amount varies widely by location.

Term

The length of the loan, commonly 15 or 30 years.