Mortgage Glossary
Understanding the language of mortgages makes the entire homebuying process easier and less intimidating. Kim Mitchell believes that an educated borrower is a confident borrower — and that starts with knowing what the terms mean. Use this glossary as your reference guide throughout your homebuying journey, and reach out to Kim directly whenever you have questions.
A
Ad Valorem
Latin for “according to valuation,” usually referring to a type of tax or assessment based on the value of the property being taxed.
Affidavit
A sworn statement reduced to writing and made under oath before a Notary Public or other official authorized by law to administer an oath.
Amortization
The gradual repayment of a debt through systematic payments of principal and interest over a set period of time, at the end of which the balance reaches zero.
Annual Percentage Rate (APR)
The relationship of the total finance charge to the total amount financed, expressed as a yearly rate as required under the Federal Truth-in-Lending Law. The APR is a broader measure of the cost of a mortgage than the interest rate alone.
Appraisal
The process of estimating or determining the market value of real property. An appraisal is typically conducted by a licensed independent appraiser and may take the form of a written report, a completed form, or a letter.
Appreciation
An increase in the value of property due to economic or related causes, which may be temporary or permanent.
Assessed Valuation
The value of real property as established by a government authority for the purpose of calculating property taxes.
B
Beneficiary
A person designated to receive benefits, proceeds, or assets — such as the proceeds from a will, insurance policy, or trust.
Bill of Sale
A written agreement by which one person sells, assigns, or transfers their interest in personal property to another.
Boundaries
The perimeters or limits of a parcel of land as defined by its legal description, typically expressed as a metes and bounds description.
Breach of Contract
Violation of any of the terms or conditions of a contract without legal excuse, such as failure to make a payment when due.
Broker
A person who acts as an intermediary between parties to a transaction. A real estate broker is a licensed professional who facilitates the sale or lease of real property for a fee or commission.
C
Clear Title
Title to property that is free from liens, defects, or other encumbrances — sometimes referred to as clean title or marketable title.
Closing
The final stage of a real estate transaction in which the seller delivers title to the buyer in exchange for the purchase price, and all documents are signed and funds are disbursed.
Closing Costs
Expenses associated with the purchase or refinance of a home that must be paid in addition to the down payment. These typically include lender fees, title charges, appraisal fees, prepaid taxes, and insurance.
Closing Disclosure
A document provided to the borrower at least three business days before closing that outlines the final loan terms, interest rate, monthly payment, and all closing costs.
Closing Statement
A detailed accounting of a real estate transaction prepared by an escrow officer or settlement agent, showing all cash received, charges and credits made, and cash paid out.
Commission
Compensation paid to a real estate broker for services rendered in connection with the sale or exchange of real property, typically paid by the seller.
Compound Interest
Interest computed on both the original principal and any previously accrued interest.
Contract
A legally binding agreement between parties who agree to perform or refrain from performing certain acts in exchange for consideration.
Counter-Offer
A new offer made in response to an offer received from another party, which effectively rejects the original offer.
D
Deed
A written instrument by which a property owner transfers ownership in real property to another party.
Deed of Trust
A legal document in which title to property is transferred to a third-party trustee as security for an obligation owed by the borrower to the lender.
Default
Failure to fulfill a duty, promise, or obligation. The most common form of default in real estate is failure to make mortgage payments when due.
Deposit
Money offered by a prospective buyer as an indication of good faith when entering into a purchase contract — also known as earnest money.
Depreciation
A loss in value of property due to any cause, including physical deterioration, functional obsolescence, or external factors.
Discount Points
An upfront fee paid to a lender at closing to reduce the interest rate on a mortgage loan. One point equals one percent of the loan amount.
Due on Sale Clause
A provision in some mortgages requiring the borrower to pay off the mortgage in full upon the sale of the property.
E
Earnest Money
A deposit submitted with a purchase offer to demonstrate the buyer’s good faith and commitment to the transaction. Earnest money is credited toward the buyer’s down payment or closing costs at closing.
Easement
A legal right that allows one party to use another party’s land for a specific and limited purpose.
Equity
The difference between the market value of a property and the amount still owed on the mortgage. As a homeowner pays down their loan and property values increase, equity grows.
Escrow
The process by which funds and documents are held by a neutral third party until all conditions of a transaction are satisfied.
F
Fair Market Value
The price a property would sell for on the open market between a willing buyer and a willing seller, both having full knowledge of the relevant facts and neither being under pressure to act.
Federal Housing Administration (FHA)
A federal agency established in 1934 to improve housing standards, provide mortgage insurance on loans made by approved lenders, and stabilize the mortgage market. FHA loans are popular among first-time homebuyers due to their low down payment requirements.
Fee Simple
The most complete form of property ownership, giving the owner unlimited rights to use, sell, or transfer the property.
Finance Fee
A fee charged by a lender or mortgage broker to cover the costs of originating and placing a mortgage loan — also known as an origination fee.
Fixed-Rate Mortgage
A home loan in which the interest rate remains the same for the entire term of the loan, resulting in predictable monthly principal and interest payments.
G
Garnishment
A legal process allowing a creditor to collect a debt by seizing a debtor’s assets held by a third party.
Gross Lease
A lease in which the tenant pays a fixed rent and the landlord covers taxes, insurance, and other property expenses.
H
Highest and Best Use
The most profitable and legally permissible use of a property at a given point in time, as determined during an appraisal.
HOA (Homeowners Association)
A nonprofit organization of property owners in a subdivision, condominium, or planned community that enforces rules and maintains common areas.
HUD (Department of Housing and Urban Development)
A federal cabinet department responsible for national housing policy and programs, including FHA mortgage insurance and fair housing enforcement.
Hypothecate
To pledge property as security for a debt without transferring possession of it.
I
Imputed Interest
Interest implied by federal tax law when a loan is made at below-market rates.
Income Approach
A method of appraising property based on the income it is expected to generate over its remaining economic life.
Inspection
A professional examination of a property’s physical condition, typically conducted by a licensed home inspector prior to closing.
Interest
The cost of borrowing money, expressed as a percentage of the loan amount and paid to the lender over the life of the loan.
J
Judgment Lien
A legal claim against a debtor’s property arising from a court judgment, which must typically be satisfied before the property can be sold or refinanced.
Junior Mortgage
A mortgage that is subordinate in priority to an existing first mortgage on the same property — such as a second mortgage or home equity loan.
L
Land
The surface of the earth and everything permanently attached to it, including minerals below the surface and air rights above.
Lease
A legal contract between a landlord and tenant conveying the right to occupy and use a property for a specified period in exchange for rent.
Letter of Credit
A bank commitment to honor drafts or payment demands from a third party upon compliance with specified conditions.
Lien
A legal claim against a property as security for a debt or obligation that must be satisfied before the property can be transferred.
Listing
A written agreement between a property owner and a real estate broker authorizing the broker to market and sell the property.
Loan-to-Value Ratio (LTV)
The ratio of the mortgage loan amount to the appraised value or purchase price of the property, whichever is lower. Lenders use LTV to assess risk — a lower LTV generally means better loan terms.
M
Market Value
The most probable price a property would bring in an open and competitive market under fair conditions.
Mortgage
A legal document in which a borrower pledges real property as collateral to secure repayment of a loan. If the borrower defaults, the lender has the right to foreclose on the property.
Mortgage Banker
A company that originates mortgage loans using its own funds and typically sells them on the secondary market.
Mortgage Broker
A person or company that acts as an intermediary between borrowers and lenders, helping match borrowers with appropriate loan products.
Mortgagee
The lender who holds a mortgage as security for a loan.
Mortgagor
The borrower who pledges property as collateral by signing a mortgage.
N
Negotiation
The process of discussing and reaching a mutually acceptable agreement between two or more parties.
Net Income
Gross income minus operating expenses, used to evaluate the profitability of an income-producing property.
O
Open-End Mortgage
A mortgage that allows the borrower to borrow additional funds up to the original loan limit without executing a new mortgage.
Origination Fee
A fee charged by a lender for processing and funding a mortgage loan, typically expressed as a percentage of the loan amount.
P
Personal Property
Moveable property that is not permanently attached to land or a building — as distinguished from real property.
Points
A fee paid to the lender at closing, where each point equals one percent of the loan amount. Points can be paid to lower the interest rate on a loan.
Prepaid Interest
Interest collected at closing for the period between the closing date and the first day of the following month.
Principal
The outstanding balance of a loan on which interest is calculated. As payments are made, the principal balance decreases.
Private Mortgage Insurance (PMI)
Insurance required on most conventional loans when the down payment is less than 20% of the purchase price. PMI protects the lender in the event of borrower default and can be removed once sufficient equity is established.
Prorate
To divide or distribute costs proportionately between buyer and seller at closing — such as property taxes or HOA dues.
Q
Qualifying Ratios
The ratios used by lenders to determine whether a borrower qualifies for a mortgage, typically comparing monthly housing expenses and total debt to gross monthly income.
R
Realtor
A licensed real estate broker or agent who is an active member of the National Association of Realtors and adheres to its code of ethics.
Refinance
The process of obtaining a new mortgage loan to pay off an existing one — often to secure a lower interest rate, reduce monthly payments, or access home equity.
S
Second Mortgage
A mortgage that is subordinate to the first mortgage on the same property. In the event of foreclosure, the first mortgage is paid before the second.
Security Deposit
Money held by a landlord to cover potential damages, unpaid rent, or other lease violations by a tenant.
T
Title
Legal evidence of a person’s right to ownership of real property.
Title Insurance
A policy that protects the buyer and lender against losses arising from disputes over property ownership, undisclosed liens, or title defects. Title insurance is typically required by lenders at closing.
Title Search
An examination of public records to confirm a property’s legal ownership and identify any claims, liens, or encumbrances against it.
U
Underwriting
The process by which a lender evaluates the risk of a mortgage loan by reviewing the borrower’s credit, income, assets, and the property’s value before issuing a final approval.
V
VA Loan
A mortgage loan guaranteed by the U.S. Department of Veterans Affairs and available to eligible veterans, active-duty service members, and qualifying military spouses. VA loans offer significant benefits including no down payment and no monthly mortgage insurance.
W
Warranty Deed
A deed in which the seller guarantees clear and marketable title to the property and agrees to defend the buyer against any future claims.
Have a Question About a Term You Don’t See Here?
Mortgage language can be confusing — and the glossary only goes so far. If you come across a term that isn’t listed here or want a plain-language explanation of something specific to your loan, reach out to Kim directly. She is happy to walk you through anything at any stage of the process.
