Mortgage terms: Defined and explained

Whether you want to take out a mortgage or already have one, it’s helpful to familiarize yourself with the terms you might encounter. A clear understanding of common mortgage terms can help you navigate the ins and outs of home loans more confidently.

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5/1 Adjustable-rate mortgage

A 5/1 adjustable-rate mortgage is a home loan that offers a fixed interest rate for the first 5 years of a loan term. After 5 years, it switches to an adjustable interest rate, meaning it changes for the remainder of the loan term. The interest rate will adjust up or down once per year based on current market conditions. The interest rate cannot go over a certain capped amount during any one adjustment period.

5/6 Adjustable-rate mortgage

A 5/6 ARM offers a fixed interest rate for the first 5 years of a loan term, including fixed principal and interest payments. After the first 5 years, the interest rate will adjust every 6 months. It will change based on the current benchmark rate and rate caps.

7/1 Adjustable-rate mortgage

A 7/1 ARM offers a fixed rate for 7 years. When the introductory period is up, the interest rate adjusts every year after that. You make adjustable-rate payments until your loan term is up. For example, if you have a 30-year loan term, you’d make adjustable-rate payments for the next 23 years.

7/6 Adjustable-rate mortgage

Like a 7/1 ARM, a 7/6 ARM offers a lower interest rate for the first 7 years of the loan term. After that initial period for a 7/6 ARM, the interest rate will change every 6 months. Mortgage rates will depend on the financial market index, interest rate floors, caps on interest rates, and other factors.

10/1 Adjustable-rate mortgage

A 10/1 ARM offers a fixed rate for the first 10 years of the loan. After that introductory period, the interest rate will fluctuate due to market conditions. For example, if you have a 30-year mortgage, your payments will change over the course of 20 years.

A

Ability-to-repay rule

The ability-to-repay rule prohibits lenders from giving you a mortgage unless they make a reasonable determination that you can’t repay the loan. Lenders must evaluate your income, assets, employment, credit history, and monthly expenses. They also cannot simply “give” you an introductory rate. For example, if you want to take on an ARM, the lender must determine whether you can repay a possible higher interest rate in the future.

Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage is a type of loan with an interest rate that changes over time. When you sign up for an ARM, you first get a period of fixed interest, which is usually lower than you’ll find with a fixed-rate loan. This is the introductory period of the loan and can last for up to 10 years. After the introductory period, your interest rate will follow market rates, which are often referred to as a variable or floating interest rate. But there is a limit to how much the interest rate attached to your loan can rise or fall due to predetermined caps.

Amortization

Loan amortization describes how the interest and principal components of your loan are spread out over your payments. When you make a payment on your mortgage, a percentage of it goes toward interest and a percentage goes toward your loan principal. At the beginning of your loan, most of your monthly payment is allocated toward interest due to a high principal balance. But as you chip away at the loan balance, more of your monthly payment will be directed to your principal.

Annual percentage rate (APR)

Annual percentage rate describes the cost of borrowing. It includes the interest rate you’ll pay on your loan annually and any extra lender fees. APR is usually expressed as a percentage. You may see two interest rates listed when you shop for a loan. The larger number is always your APR because it includes fees.

Appraisal

An appraisal is a written estimate of how much your home is worth. Most mortgage lenders require buyers to get an appraisal before finalizing a home loan. The appraisal is intended to confirm that the lender isn’t loaning you more money than what your home is worth. Your lender may help you by scheduling an appraisal, done by an independent third party.

Appreciation

Home appreciation indicates that the value of a property increases in value over time. As a property appreciates, the homeowner can watch their home equity grow.

Assessed value

The assessed value, sometimes called the tax-assessed value, is a metric used when determining property taxes. A higher assessed value leads to higher property taxes. In general, the assessed value of your home is considered a stable indicator of a home’s value.

Assets

Assets encompass anything that you own that has a cash value. Some common assets include your stocks, physical cash, a savings account and bonds.

Automatic payment

An automatic payment is a withdrawal that comes out of your checking or savings account from your bank account on a specific date each month. The payment comes out via Automated Clearing House withdrawal at the same time each month.

B

Balloon loan

A balloon loan, or balloon mortgage, is a nontraditional mortgage. The loan gets its name from the large lump sum payment expected at some point during the loan term. Generally, the lump sum payment is required at the end of your loan term. During the loan term, a balloon loan might require you to make interest-only payments or both principal and interest payments. Interest-only mortgages only require you to pay the cost of interest throughout your term with the entire balance due at the end.

Biweekly payment

As a homeowner, you may have the option to make biweekly payments. This means you’ll make a half mortgage payment every 2 weeks instead of a single monthly payment. With this repayment schedule, you’ll make an extra month’s worth of payments every year. While the specifics vary, this means you could pay off your mortgage years ahead of schedule.

Break-even point

The break-even point is when the cost of your mortgage (typically if you buy mortgage points or refinance your loan) has been recouped. For example, if you buy mortgage points, you can lower the interest rate on your mortgage. While this can lead to savings over the long term, you’ll pay for the mortgage points up front. The break-even point indicates when the cost of your mortgage points has been recouped by your interest savings. It’s a good idea to calculate your break-even point to make sure you plan on living in the home long enough to make purchasing mortgage points worth it.

Bridge loan

A bridge loan is a short-term financing solution, generally with loan terms of 6 months to 1 year. These loans are often used to finance the purchase of a new house before you sell your current house. This transitional loan is sometimes called a swing loan.

Broker

A real estate broker has the legal qualifications to help you through a real estate transaction. The broker’s job is to confirm that the real estate transaction complies with state regulations. They also ensure the paperwork is correct and that the funds make it to the appropriate parties.

Buydown

A buydown offers a way to lower your mortgage interest rate. You can do this by purchasing discount points or mortgage points, which are one-time fees that you pay at closing to lower your interest rate.

C

Cash to close

The term cash to close indicates how much money you’ll need to bring to the closing table. This includes closing costs and your down payment. You should know how much cash to close or funds to close you’ll need before closing day. With that information, you can come prepared with the appropriate amount.

Cash-out refinance

A cash-out refinance offers a way to tap into your home equity. It works by taking out a bigger mortgage than your existing loan. You’ll use the funds to pay off your current mortgage and pocket the difference in cash. At the end of this transaction, you’ll still have a single mortgage payment to keep up with.

Closing

Closing on a mortgage is the last step in the home buying process. At this point, you’ll sign all the paperwork and hand over the funds to finalize your home purchase.

Closing costs

Closing costs are the funds you pay your lender to finalize your loan. Closing costs usually total 3% – 6% of the total value of your loan. Common closing costs include appraisal fees, loan origination fees and credit checks. The exact cost will vary based on your situation.

Closing Disclosure

A Closing Disclosure is a document that includes the final details of your loan. It will include your interest rate, loan principal, and the closing costs you must pay. Your lender is legally required to give you at least 3 days to review your Closing Disclosure before you sign on your loan. If you spot an error or have a question, use this 3-day window to get clarification from your lender.

Co-borrower

A co-borrower is someone who applies for a loan with you. If approved, both borrowers are legally responsible for repaying the loan. In most cases, co-borrowers share the title to the house.

Collateral

Collateral is an asset used to secure a loan. With home loans, the home acts as collateral for the mortgage. If the borrower doesn’t keep up with the payments, the lender has the right to seize the collateral.

Construction loan

A construction loan is a short-term loan designed to cover the upfront cost of building a new house. After the home is built, the homeowner can apply for a traditional mortgage to pay off the construction loan.

Contingency

A contingency clause in a home purchase offer indicates that a certain condition must be met before the sale is finalized. If the condition isn’t met, the buyer and seller will no longer have an enforceable purchase agreement.

One example is the common inspection contingency. This states the buyer has the right to back out of the deal if they don’t like what is found during the inspection.

Conventional loan

A conventional loan is not backed by a government program. Most conventional loans are also conforming, which means they meet federal requirements that allow Fannie Mae and Freddie Mac to buy the loans from lenders. In general, conventional loans have stricter borrower requirements than government-backed loans.

Co-signer

A co-signer is someone who signs with you for a loan, like a mortgage. As a co-signer, you take on the responsibility for repaying the loan. With that, it’s a significant financial commitment. But co-signers generally don’t get their name on the title of the home.

Credit report

A credit report is a history of your interactions with credit over the years. For example, it includes information about which loans you have taken out and the payment history for these loans. Lenders can use this information to gauge your creditworthiness.

Credit score

A credit score is a three-digit number that assesses your creditworthiness based on information in your credit report. If you have good credit habits, like making on-time payments, you’ll likely have a high score. Lenders look at your credit score when considering your mortgage application. In general, borrowers with excellent credit are more likely to get approved and benefit from lower interest rates.

Curtailment

In the world of mortgages, a curtailment indicates paying off all or part of your mortgage ahead of schedule. A full mortgage curtailment involves paying off the rest of your mortgage balance in one transaction. A partial mortgage curtailment involves making extra payments of any size.

D

Debt-to-income ratio (DTI)

Your debt-to-income ratio is a measure of how your monthly debt obligations stack up to your income. You can calculate this number by adding up your minimum monthly payments and dividing that by your total monthly gross income. Mortgage lenders look at your DTI when they consider you for a loan to make sure that you have enough money coming in to afford your debts. You may have trouble finding a loan if your DTI is too high.

Demand feature

The demand feature on a Closing Disclosure permits the lender to require early loan repayment. If the demand feature is checked “yes” on the Disclosure, the lender can require you to pay the loan balance at or after the date in the loan documents at any time. Most mortgages do not have a demand feature.

Deed

A deed is a physical document that indicates your ownership of the property.

Deed in lieu of foreclosure

If you are behind on your mortgage payments, deed in lieu of foreclosure gives you an opportunity to avoid the foreclosure process. Instead of waiting for the lender to foreclose, you’d voluntarily hand over your deed and give the property to the lender. A deed in lieu of foreclosure will help lessen damage to your credit score.

Deed of trust

A deed of trust is an agreement between the lender and the homeowner that states the home buyer will repay the mortgage lender. Until the mortgage is paid off, the lender will hold onto the property’s title. This agreement can secure a real estate transaction in some states.

Down payment

A down payment is the first payment you make on your mortgage loan and is due at closing. Generally, down payments are listed as a percentage of your loan value. For example, if you have a 20% down payment on a $100,000 home, you’ll bring $20,000 to closing and mortgage the remaining $80,000. Most loan types require some kind of down payment. You can buy a home with as little as 3% down. However, you’ll be required to pay private mortgage insurance on conventional loans with less than 20% down payment. Some types of government-backed loans may even allow you to buy a home with no down payment.

E

Earnest money deposit

An earnest money deposit is a check that you write to a seller when you make an offer on a home. The purpose is to give the seller confidence that the buyer is serious about finalizing the home purchase. Most earnest money deposits are equal to 1% – 3% of the home’s value. If the seller accepts your offer, your earnest money deposit goes toward your down payment at closing.

Encumbrance

An encumbrance is a type of claim on the property that limits how the owner can use it. Generally, encumbrances are seen as a negative. For example, environmental regulations or zoning laws could create an encumbrance for how to use a specific property.

Equity

Home equity represents the difference between your home’s market value and the amount you still owe on your mortgage. You can easily determine your home equity by subtracting your remaining mortgage balance from your home’s market value. When you pay off your entire mortgage, you’ll reach 100% home equity, and your lender will remove its lien on your home.

Escrow

An escrow account is where lenders hold money for your property taxes or homeowners insurance. Throughout the year, the lender will set aside a portion of your monthly payment for property taxes and insurance. When these bills are due, the funds will come out of your escrow account.

F

Fair market value (FMV)

Fair market value represents the amount a property will sell for in the open market. If selling your home, the buyer and seller must agree on a purchase price, which can be considered the FMV if selling on the open market.

Fannie Mae

Fannie Mae is a government-sponsored enterprise. It purchases conforming mortgages from lenders and guarantees the loans in the secondary mortgage market. It often repackages and sells these as mortgage-backed securities to investors. The goal of this service is to provide more liquidity in the mortgage market to enable more affordable housing opportunities.

FHA mortgage insurance premiums (MIP)

All FHA loan borrowers pay mortgage insurance premium (MIP), including an up-front premium paid at closing, which is 1.75% of the loan principal, and an annual MIP, which is rolled into the monthly mortgage payments either for 11 years or the duration of the loan term. Your annual payment depends on your loan amount, term, down payment, and loan-to-value (LTV) ratio.

FHA mortgage limits

FHA mortgage limits refer to the maximum loan amount you can borrow based on your area. HUD offers a tool to research the maximum amount you can borrow. You can choose your state and county in the HUD tool to learn the ceiling and floor limits in your area.

Federal Housing Administration (FHA)

The Federal Housing Administration is an agency within the U.S. Department of Housing and Urban Development. The FHA backs FHA loans, which offer less stringent borrower requirements to home buyers. If the buyer defaults, the FHA will cover the losses incurred by the lender, up to the guaranteed amount.

Finance charge

A finance charge is a fee you pay for borrowing money from a lender or creditor that lessens their lending risk. It may be either a flat fee or percentage of the borrowed amount. The amount you’ll pay depends on your lender, loan type, amount borrowed, and the finance charge type.

Fixed-rate mortgage

A fixed-rate mortgage has the same interest rate throughout the term of the loan. Homeowners who choose a fixed-rate term prefer the stability and predictability this type of loan provides.

Floating rate

A floating-rate mortgage is a less-common name for an adjustable-rate mortgage.

Forbearance

Mortgage forbearance involves temporarily pausing or lowering your mortgage payments. While the payments aren’t waived forever, the period of fewer payments could give you a chance to get back on your feet after a period of bad financial luck. At the end of the forbearance period, you’ll be expected to repay the payments you missed.

Force-placed insurance

Borrowers sometimes allow insurance coverage to lapse. Force-placed insurance, sometimes called creditor-placed, lender-placed, or collateral protection insurance, allows lien holders to put insurance on the home to protect it. It’s often more expensive than a policy a borrower could find on their own.

Foreclosure

If you fail to make your payments on time, the lender might start the foreclosure process. Essentially, this means the lender will take steps to legally repossess the property.

Freddie Mac

Similarly to Fannie Mae, Freddie Mac is a government-sponsored enterprise that serves to increase the liquidity of the mortgage market. It buys conforming conventional mortgages from lenders, primarily smaller banks, lenders and credit unions. It repackages these loans and sells them as mortgage-backed securities to investors in the secondary mortgage market.

G

Good Faith Estimate

A Good Faith Estimate was a standardized form that provides key details about the mortgage. The Loan Estimate form replaced the GFE and the Truth-in-Lending Disclosure in 2015.

Government recording charges

Government recording charges refer to fees for recording deeds, mortgages, and other documents by state and local government agencies. Buyers or sellers may pay government recording fees.

H

Home equity line of credit (HELOC)

A HELOC offers homeowners a way to borrow their home equity. If approved, you’ll receive a credit limit, which you can borrow from on an as-needed basis during the draw period. During the draw period, you’ll often be expected to make interest payments. After the draw period, you’ll begin the repayment period when you will make payments until the loan is repaid. This flexible lending solution often comes with a variable interest rate. A HELOC will use your home as collateral, which means you are essentially taking on a second mortgage payment. If you don’t keep up with your HELOC payments, the lender could repossess your property. Rocket Mortgage® does not offer HELOCs, but feel free to contact us about your other options.

Home equity loan

A home equity loan is another way to tap into your home equity. In this type of second mortgage, you’ll receive an upfront sum that you will repay in fixed monthly payments. Rocket Mortgage® offers a Home Equity Loan – learn more about how it can meet your goals.

Home inspection

A home inspection is evaluates a home’s condition. An inspector will walk around the home to verify square footage and the number of bathrooms and bedrooms. They will also test the heating and cooling system and appliances. Sometimes a more specialized inspection is required for the roof or foundation. After the inspection, they will then give you a list of everything that needs to be repaired or replaced in the home. It’s a good idea to get a home inspection whenever you buy a property, to make sure that your home doesn’t have any major issues before you buy it.

Homeowners association (HOA)

A homeowners association is a private organization that manages a residential community. Most HOAs have a set of rules for homeowners living within the community. The rules could determine everything from pet regulations to what color paint you can use on the exterior of your home. In general, HOAs also have a set annual or monthly fee. The fees may cover things like landscaping or maintaining community property.

Homeowners insurance

Homeowners insurance covers the cost for repairs if a home’s been damaged during a covered incident. Some commonly covered incidents include fires, burglaries, and windstorms. You’ll pay an annual premium to an insurance company in exchange for coverage. You’re not legally required to get homeowners insurance to own a home, but mortgage lenders require you to maintain at least a certain level of coverage for the life of your loan.

Higher-priced mortgage loan

A higher-priced mortgage loan is a mortgage with an APR at least 1.5% higher (for first liens) or at least 3.5% higher (for second liens) than the average prime offer rate for a comparable transaction based on the rate lock date. The rate lock date is the start of the rate lock period in which a lender guarantees a mortgage interest rate and when you’re locked into that rate.

HUD (Housing and Urban Development)

The U.S. Department of Housing and Urban Development ensures that people in urban areas have fair and equal access to affordable housing. HUD fights housing discrimination, makes homeownership accessible and affordable, provides homes for those who do not have them, and supports underserved communities and minorities. It accomplishes this through programs and initiatives, including home buying assistance programs.

I

Interest rate

The interest rate attached to your mortgage represents the percentage you pay the lender to borrow the funds. Interest rates can be fixed or variable. Fixed interest rates remain unchanged for the life of your loan. Variable (or adjustable) interest rates can change over the life of your loan. Notably, the interest rates is different from the annual percentage rate or APR.

Interest rate cap

Interest rate caps limit how much the interest rate on a variable-rate loan product, such as an ARM, can increase. Interest rate caps can include an overall limit for the interest rate and the amount it can change during adjustment periods. Rate caps protect borrowers from interest rates from continually climbing upward.

Investment Property

Investment properties are bought to earn money through rental income or appreciation. Investment opportunities can be found in residential, commercial, and raw land deals.

Initial adjustment cap

Initial adjustment caps limit the amount an interest rate can go up during the first adjustment on a variable-rate loan product like an ARM.

Initial escrow deposit

An initial escrow deposit is the amount you pay at closing to start your escrow account. It may be different from what you pay to maintain your escrow account per month.

J

Jumbo loan

A jumbo loan is a large home loan. In general, a jumbo loan is a conventional loan that exceeds conforming loan limits. These limits can vary based on your location, but in 2025, most conventional loan limits are capped at $806,500. Explore how to finance a jumbo loan with Rocket Mortgage^® Jumbo Smart loans. 

L

Lien

A lien is a legal claim against a property. Your lender has a legal claim on the property until you repay the loan. When a lien exists, the lienholder may have the ability to foreclose on your home if you don’t keep up with the payment.

Lifetime adjustment cap

A lifetime adjustment cap, also called a lifetime adjustment rate cap, tells you how much an interest rate can rise or fall over the entire loan term.

Loan Estimate

A Loan Estimate is a standardized form that breaks down the details of the mortgage you’re applying for. The document includes information like estimated monthly payment, closing costs, and interest rate.

Loan modification

A loan modification is a change to your original mortgage loan terms. The modification tweaks your mortgage details, but it doesn’t replace your current mortgage with a new one.

Loan origination

A mortgage loan origination is the process of a lender creating your new loan and lending you the money. It involves an administrative process, like processing the application and underwriting the loan. A loan originator oversees this process.

Loan term

A loan term indicates the total amount of time it will take to repay the loan with regularly scheduled payments. Most mortgages have a loan term of 15 or 30 years.

Loan-to-value ratio (LTV)

A loan-to-value ratio compares the loan amount to the value of the property. You can determine your LTV ratio by dividing your mortgage balance by the appraised value of the property. In general, LTV ratio is expressed as a percentage. A higher down payment will result in a lower LTV ratio. Lenders use this ratio to offer your approved loan amount and whether you must pay private mortgage insurance.

Loan assumption

Loan assumption is when a new owner takes over a mortgage instead of getting a new one to buy the home with. Buyers often choose to buy a home with an assumable mortgage to take advantage of the seller’s lower interest rate. Most conventional loans do not allow buyers to assume a mortgage, but you may be able to assume a USDA, FHA, or VA loan.

Loan deferment

Loan deferment allows you to move due dates for missed mortgage payments to the end of your loan term due to financial hardship. Your lender or servicer will let you know whether you qualify for deferment based on certain factors such as number of missed payments and your ability to continue making your regular monthly mortgage payments.

Loss mitigation

Loss mitigation is the process of helping a struggling borrower get back on their feet financially. It can also help them exit a home loan without the ordeal of foreclosure. Reach out to your lender as soon as possible to discuss possible loss mitigation options if you can't pay your mortgage.

M

Manufactured home

A manufactured home is built in a factory in pieces based on building codes created by the U.S. Department of Housing and Urban Development. The pieces of the house are transported to the home site for assembly and installation.

Mortgage

A mortgage is a home loan from a lender. The home buyer uses the mortgage funds to purchase a home, refinance an existing mortgage, or borrow their home equity. After closing, the borrower repays the lender with interest. The house mortgaged is used as collateral to secure the loan.

Mortgage insurance

Mortgage insurance is a policy that protects the lender from loss if the borrower defaults on the loan.

Mortgage lender

A mortgage lender is a financial institution that offers home loans. The right mortgage lender can make for a trusted and smooth home buying process. Take the time to compare loan offerings and interest rates before moving forward with the right mortgage lender.

Mortgage points

Mortgage points, also called discount points, are prepaid interest. As a home buyer, you may buy mortgage points to reduce the interest rate on your loan. A single mortgage point costs 1% of your loan amount.

N

Non-owner-occupied

A non-owner-occupied unit means that the owner of the property doesn’t live in the property. In general, this means the owner intends to use the property as an investment. Most non-owner-occupied home loans involve slightly higher interest rates than owner-occupied mortgages.

O

Owner financing

Owner financing involves the owner of the property providing the financing to a buyer. It’s sometimes called seller financing. This is a contrast to the typical financing arrangement in which a buyer obtains financing through a third-party lender.

Owner-occupied

An owner-occupied property means that the owner of the property uses it as their primary residence. In the world of real estate investing, this usually means that the property owner lives on-site but rents out some of their space to tenants.

P

Payoff amount

A payoff amount indicates the total amount of money required to fully pay off a mortgage. It includes your outstanding balance, interest charges, and any potential fees.

Partial claim

A partial claim is a loss mitigation strategy available to FHA-insured mortgage borrowers struggling to make their mortgage payments. Homeowners can avoid foreclosure by deferring their past-due mortgage amounts to the end of the loan term, which the lender adds as a lump sum. It becomes due when your mortgage term ends, you sell the property, or you refinance the loan. You must demonstrate financial hardship to qualify.

Permanent Change of Station (PCS) orders

PCS orders involve changing duty stations in the military, including military relocation instructions, or directing service members and family to a new location. The orders are usually lengthier (2 – 4 years), nonnegotiable, and require you to adhere to strict guidelines. You can receive services and allowances from your mortgage lender to help you handle the move.

Preapproval

Mortgage preapproval is a lender’s estimate of how much it expects you can qualify to borrow. Many lenders consider preapproval the first step in getting a mortgage. When you apply for a preapproval, your lender will ask you about your credit score, income, assets, and other financial information. Your lender will then use these details to tell you how much money you qualify for. While preapproval isn’t a guarantee that you’ll get approved, it does give you a good idea of how much you can borrow during your home shopping.

Prepayment penalty

A prepayment penalty is a fee some lenders charge when you pay off your home loan early. Not all mortgages come with a prepayment penalty attached. But you will find out if yours does when in the process of applying for and closing on a home loan. Rocket Mortgage does not charge prepayment penalties.

Prepaid interest charges

Prepaid interest covers the interest that accrues on your mortgage from closing to your first billing period. You pay this in advance at closing.

Prequalification

Prequalification is a rough estimate of how much a lender may be willing to lend you. A prequalification isn’t the same as preapproval. Prequalification usually doesn’t involve asset and income verification. This means it’s less reliable than preapproval.

Prime rate

The prime rate is an underlying index that serves as a financial benchmark for lending institutions. When applying for a loan, the current prime rate will affect the interest rate you receive. As a starting point, it’s essentially the most favorable interest rate that a financial institution can charge its customers. But in general, the prime rate is reserved for borrowers with a stellar financial situation and a rock-solid credit score.

Principal

Your principal balance is the amount that you borrow to buy a home. As you make loan payments, your principal shrinks over time. In addition to the principal, your monthly payments will include interest charges.

Principal, interest, taxes, and insurance (PITI)

PITI stands for principal, interest, taxes, and insurance. The combination of these costs represents the monthly cost of owning a home, which lenders use when determining if you qualify for a loan. By looking at all these costs, the lender avoids extending a loan that you might have trouble paying each month.

Private mortgage insurance (PMI)

Private mortgage insurance protects the lender if you default on a conventional loan. You’re required to pay PMI if you put down less than 20% on conventional loans. The good news is that you can cancel PMI payments when you have 20% equity in your property.

Property taxes

Property taxes are levied by local governments. The amount you pay in property taxes depends on your home’s value and where you live. Property taxes typically pay for police departments, roads, libraries, schools, and community development projects.

Purchase agreement

A purchase agreement is a contract between the buyer and seller that spells out the terms of a home sale. It’s sometimes referred to as a purchase and sale agreement. This legally binding document includes critical details of the transaction. Buyers and sellers negotiate the terms of this agreement.

Q

Qualified written request (QWR)

A qualified written request is a borrower’s request to have a mortgage lender, or its servicing agent provide loan account information. You can send a QWR about mortgage loan servicing to request information about your loan or to correct any errors.

R

Rate lock

A rate lock protects borrowers from rising interest rates during the closing process. Essentially, this freezes your interest rate from the time you apply for a mortgage to closing on your home loan. If interest rates increase during this period, you’ll be able to keep the lower interest rate.

Real estate agent

A real estate agent is a licensed professional who represents the buyer or the seller in a home sale. A buyer’s agent can show you homes in your price range, draw up offer letters and negotiate sale terms with sellers. A listing agent helps sellers to market their home and get the best price possible. The real estate agents in a transaction typically split a commission, which usually is paid by the seller.

Real Estate Settlement Procedure Act (RESPA)

RESPA is designed to help borrowers navigate the mortgage loan process with all costs and fees easily accessible. It requires lenders to provide necessary financial information to buyers during the home loan process.

Refinance

If you refinance your existing mortgage, you’ll trade your original debt obligation for a new one. Borrowers might choose to refinance for a more convenient payment schedule, a lower interest rate or a different term. Before refinancing your mortgage, consider the closing costs associated with getting a new loan.

Repayment period

The repayment period attached to your mortgage indicates how long it will take you to repay the loan. For example, a 30-year mortgage has a repayment period of 30 years. In the context of HELOCs, the repayment period indicates when you will be expected to repay the amount you borrowed. Generally, you cannot borrow any more funds from the line of credit during the repayment period.

Reverse mortgage

A reverse mortgage is a loan product that allows older homeowners to borrow their home equity. Instead of making payments to your lender and reducing the balance owed on your home, the lender will make regular payments to you and increase the balance. While a reverse mortgage can give you an extra income stream during retirement, you reduce your equity. Rocket Mortgage® doesn’t offer reverse mortgages, but we can help you learn more about your options.

Right of first refusal (ROFR)

The right of first refusal is a legal clause. It gives interested buyers the contractual right to be the first party to place an offer on or buy a property when the owner chooses to sell it. The clause is commonly found in lease agreements in which the buyer expresses interest in purchasing the home.

Right of rescission

The right of rescission gives a buyer the opportunity to cancel a refinance loan within 3 business days of finalizing the transaction. Essentially, this presents a chance to change your mind on a major loan such as a cash-out refinance or a home equity loan if you discover a problem after closing.

S

Second mortgage

A second mortgage is a lien against an already-mortgaged property. The lien is taken out on the portion of your home you’ve already paid off. In exchange, you receive cash. You can use the cash for anything you want to purchase. Types of second mortgages include home equity loans and HELOCs. You may pay more in interest on a second mortgage, and you’ll have two mortgage payments, but second mortgages often offer lower interest rates than credit cards.

Security interest

A security interest means your lender can take your home and sell it to pay off the loan if you default. Signing the closing forms confirms a type of security interest through a contract.

Secured Overnight Financing Rate (SOFR)

SOFR is the interest rate set by the U.S. Treasury to determine overnight borrowing for banks. Notably, this replaced the London Interbank Offered Rate, or LIBOR.

Seller concessions

Seller concessions are closing costs that the seller pays instead of the buyer. Buyers and sellers can negotiate seller concessions. For example, a buyer might ask the seller to pay appraisal fees or the title search and insurance fees. The seller may accept or reject the concessions or send you a counteroffer with concessions removed.

Seller financing

Seller financing is a home sale in which the seller accepts installment payments directly from the buyer. This differs from a traditional sale, in which a buyer obtains financing from a lender and the seller is paid in full at closing.

Servicer

A mortgage servicer handles the everyday tasks of managing your loan, such as processing payments, responding to your questions, keeping track of principal and interest paid, and managing your tax and escrow accounts. You can learn the name of your loan servicer by checking your monthly mortgage statement or by calling the MERS® Servicer Identification at (888) 679-6377 or visiting the MERS^® website. 

Shared appreciation mortgage (SAM)

A shared appreciation mortgage is a home loan that exchanges a portion of a home's appreciation to the mortgage lender for a lower interest rate, down payment, closing cost assistance, or funds for home repairs. You’ll reduce your up-front costs or receive a lower monthly payment, and the lender receives a share of the proceeds when you sell.

Short sale

A short sale involves a homeowner selling a property for less than the remaining mortgage amount. After the sale, the mortgage lender keeps all proceeds. From there, the lender might forgive the remaining balance or consider it as taxable income for the borrower. Typically, this only happens when the homeowner is facing significant financial distress.

Subprime mortgage

Subprime mortgages are home loans directed toward borrowers with lower credit scores and poor credit history. They typically have higher closing costs and higher interest rates. Subprime mortgages were largely responsible for the subprime mortgage crisis that devastated the housing market between 2007 and 2010.

Survey

A survey, also called a land survey, maps out the boundaries of a land parcel. It includes physical features and can document features like elevation levels and angles. Homeowners may get land surveys to fulfill mortgage requirements, resolve disputes with neighbors, to buy or sell their homes, install utilities, parcel out land, or to update an existing survey.

T

Title

A title is legal proof that you own a home. A title includes a physical description of the property, the names of anyone who owns the property, and a list of any liens on the home.

Title insurance

Title insurance protects home buyers against outside claims to the property. Unlike other types of insurance, you don’t need to pay for title insurance every month. Instead, you make a single payment at closing that protects you for as long as you own the home. It’s a typical closing cost for homeowners.

Title service fees

You pay title service fees as part of your closing costs to issue a title insurance policy for your lender. The fees include the title search fee, the premium for the lender’s title insurance policy, and other costs.

Total interest percentage (TIP)

The total interest percentage tells you the amount of interest you’ll pay over the life of your mortgage loan. Your lender figures the TIP by adding the scheduled interest payments and dividing the total by the loan amount to get a percentage. You can learn more about the TIP on your Loan Estimate or Closing Disclosure.

Truth in Lending Act (TILA)

The Truth in Lending Act was passed in 1968. It is designed to require lenders to disclose all necessary information during the lending process. The goal is to eliminate predatory lending practices such as unfair loan terms, high fees, hidden fees, high interest rates, and more.

U

Underwriting

Underwriting occurs when a lender verifies the details of your financial situation before they approve your home loan. For example, the lender will verify your assets, income, debt, property details, and more.

Unsecured loan

An unsecured loan requires no collateral. In contrast, secured loans are backed by an asset. For example, mortgages are secured loans backed by the home. But student loans and credit cards are unsecured.

Up-front costs

The up-front costs of buying a house can add up quickly. It’s important to be clear on the costs of buying a home to help you avoid any uncomfortable surprises.

U.S. Department of Agriculture (USDA) loan

The U.S. Department of Agriculture backs USDA loans. These loans create affordable homeownership opportunities for low- to mid-income borrowers in rural areas. Depending on your situation, you can qualify for a loan with no down payment and competitive interest rates.

V

Variable rate

A variable rate changes throughout the life of your loan. If you get a mortgage with a variable rate, the interest rate will change based on market conditions at predetermined intervals.

Verified Approval Letter (VAL)

Rocket Mortgage® offers a Verified Approval Letter. Like other mortgage approvals, it involves a credit check and financial information review. However, it carries more weight than other types of mortgage preapprovals because it comes from a trusted lender with a solid brand name, instilling more seller confidence in buyers.

Veterans Affairs (VA) loan

The U.S. Department of Veterans Affairs backs VA loans. These loans create affordable homeownership opportunities for buyers with sufficient military experience. You’ll need to have a qualifying connection to the military. But if you qualify, you can buy a home with no down payment.

W

Walk-through

A final walk-through gives you one last opportunity to inspect a property before the closing is complete. You can use this time to confirm the property is in the condition you expect and verify the seller has completed everything that was agreed to.

The bottom line: Learning mortgage terms can help you understand the home buying process

When getting a mortgage, you might have a string of new words thrown your way. It’s helpful to get a handle on this vocabulary to help you navigate the home buying process.

If you are ready to purchase a home, start the mortgage process today.