Mortgage Terms
Explanation of Mortgage Terms
Mortgage terminology can sometimes feel confusing for homebuyers. The definitions below explain some of the most common mortgage and home loan terms to help you better understand the home financing process.
Home Price
The home price (also called the purchase price) is the amount a buyer agrees to pay for a property. Home prices vary depending on location, market conditions, property size, and amenities.
When searching for a home, it is important to consider how the purchase price fits into your overall budget and financing plan. Your lender can help determine what price range may be appropriate based on your income, assets, and credit profile.
Down Payment
A down payment is the upfront portion of the home’s purchase price that the buyer pays at closing. It is typically expressed as a percentage of the total home price.
For example, a 20% down payment on a $200,000 home equals $40,000.
Down payment requirements vary depending on the type of loan program and borrower qualifications. Some mortgage programs allow lower down payments, while a 20% down payment may help avoid private mortgage insurance (PMI) on certain conventional loans.
Mortgage Types
15-Year Fixed-Rate Mortgage
A 15-year fixed-rate mortgage is a home loan that is repaid over 15 years with an interest rate that remains the same throughout the life of the loan.
Because the loan term is shorter, monthly payments are typically higher than a 30-year mortgage. However, borrowers often pay less interest overall and build home equity more quickly.
30-Year Fixed-Rate Mortgage
A 30-year fixed-rate mortgage is one of the most common types of home loans. The loan is repaid over 30 years, and the interest rate remains fixed for the entire term.
This longer repayment period generally results in lower monthly payments compared with shorter-term loans, making it a popular option for many homebuyers.
5/1 Adjustable-Rate Mortgage (ARM)
A 5/1 adjustable-rate mortgage (ARM) is a 30-year home loan with an initial fixed interest rate for the first five years. After the initial fixed period, the interest rate may adjust annually based on market conditions and the terms of the loan.
ARMs often start with a lower initial interest rate compared with fixed-rate mortgages, but the rate may increase or decrease after the fixed period ends.
Interest Rate
The interest rate is the cost of borrowing money from a lender. It is typically expressed as an annual percentage of the remaining loan balance.
Interest is included in your monthly mortgage payment and gradually decreases as the loan balance is paid down over time.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is insurance that protects the lender if a borrower defaults on a loan. PMI is typically required for conventional loans when the down payment is less than 20% of the home’s purchase price.
PMI is usually calculated as a small percentage of the loan amount and is added to the monthly mortgage payment until the borrower reaches sufficient equity in the property.
Homeowner’s Insurance
Homeowner’s insurance is a type of property insurance that protects a home and personal belongings from certain risks such as fire, storms, theft, or other covered events.
Most mortgage lenders require homeowners to maintain an insurance policy for the duration of the loan. The insurance premium is often included in the monthly mortgage payment through an escrow account.
Homeowner’s Association (HOA) Fees
Homeowner’s Association (HOA) fees are payments made by property owners in communities governed by a homeowner’s association. These fees help cover the cost of maintaining shared spaces, community amenities, and neighborhood management.
HOA fees vary depending on the community and services provided.
Monthly Payment
The monthly mortgage payment is the amount a borrower pays each month toward their home loan. This payment typically includes:
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Principal (repayment of the loan balance)
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Interest (cost of borrowing)
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Property taxes
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Homeowner’s insurance
These components are often referred to as PITI: Principal, Interest, Taxes, and Insurance.
Property Taxes
Property taxes are taxes assessed by local governments based on the value of a property. These taxes help fund local services such as schools, infrastructure, and public safety.
Many lenders collect property taxes as part of the monthly mortgage payment and hold them in an escrow account until they are paid to the local tax authority.
Pre-Qualification
Mortgage pre-qualification is an initial estimate of how much a borrower may be able to borrow for a home loan. It is typically based on information provided by the borrower regarding income, assets, debts, and credit history.
Pre-qualification helps buyers understand their potential price range before beginning the home search process.
Pre-Approval
Mortgage pre-approval is a more detailed review of a borrower’s financial information by a lender. During the pre-approval process, the lender evaluates credit history, income documentation, assets, and debt obligations.
If approved, the borrower receives a pre-approval letter indicating the estimated loan amount they may qualify for, which can strengthen their offer when purchasing a home.
