Understanding Common Mortgage Terms

by Washington Federal Team on September 1, 2011

To be a knowledgeable home buyer, it helps to understand some of the terminology used in the mortgage industry.  Of course, a good loan officer will make sure you understand the process and ensure you are finding financing that best meets your individual needs.  Below is an overview of the common mortgage terms you may come across when applying for a loan.


An appraisal determines the market value of the real estate being sold, purchased or built. The appraisal is based on recent sales activity in the area with consideration for size, condition and location of the property . Do not confuse the appraisal a lender requires with a property evaluation or tax assessed value.  Never pay for your own appraisal if you are purchasing a home.


APR stands for Annual Percentage Rate.  Consider it the best way to compare loan offers.  The APR calculates the yearly finance cost of the mortgage, expressed as a percentage rate. It takes into account the fees and points you pay to the lender.  This makes the APR  a more accurate reflection of your true cost of borrowing than the base interest rate, which is used to  determine your monthly payment. Use caution when comparing different loan types such as a fixed rate loan to an adjustable rate loan.  An adjustable rate loan can only assume what interest rates may be in the future.

Amortization or Amortized

Amortization refers to spreading loan payments over multiple periods in equal amounts.


An ARM refers to an adjustable rate mortgage.  The interest rate for an ARM is not fixed and will change over the life of the loan.

Balloon Loans

Some mortgages may require that the full loan be paid back after a period of time, usually 3-7 years.  With a balloon loan, your monthly payment may be calculated based on paying the loan back(amortized) over 30 years, but at the end of the balloon term, you must pay the loan in full, possibly by refinancing. You may save money on payments, however you risk having a significantly higher mortgage payment in the future if interest rates increase during the term of your balloon loan.

Closing Costs

Closing Costs are the fees due at mortgage settlement, and they’re detailed in the Good Faith Estimate. These fees include loan origination fees, legal charges, taxes, title insurance, appraisal fees, and the cost of processing the loan. They usually range from 2 percent to 4 percent of the property price.

Debt-to-Income Ratio

This ratio (DTI) is calculated at the time of mortgage application to see how much of a burden your debt creates on your monthly budget. It is the percentage of the applicant’s gross income that’s devoted to paying off debt each month.  Most lenders will want no more than 36 percent to 42 percent of your gross income going to make monthly debt payments.  That includes home loans, car payments, minimum credit card payments, student loans and personal loans.

Discount Points

The amount you pay in exchange for a lower base interest rate.  Discount points, like loan origination fees, are expressed as a percentage, such as 1.5 percent.  That percentage is applied to your loan amount to determine the dollar cost of obtaining a discounted rate.

Down payment

The down payment is the amount of cash put toward the home purchase.  It is subtracted from the sales price when calculating total amount that will be borrowed.   The best rates and terms are often offered to borrowers who put at least 20% down.

Good Faith Estimate

The Good Faith Estimate (GFE) is an estimate of closing costs such as lender charges and the necessary expenses to acquire a home loan. Your lender is required to supply you with your GFE within 3 days of a completed application.


The amount charged for borrowing funds is known as interest. Your interest rate is the expressed as a percentage. It is used to calculate your monthly mortgage payment based on the amount of time you will have to repay the loan. Mortgage payments are usually amortized (paid back) over a term of 15 or 30 years.

Loan-to-Value Ratio

The Loan-to-Value Ratio (LTV) is the ratio of the amount borrowed in comparison to the value of the home expressed as a percentage rate.  The higher your down payment (home equity when refinancing), the lower your LTV.  For example, if you are purchasing a home and make a 20 percent down payment, your LTV will be 80 percent.


A mortgage is a security interest in real property held by a lender as security for a loan.  A mortgage in itself is not a debt, it is the lender’s security for a debt.  Today in most states the lender does not have a mortgage but has a deed of trust which is a deed wherein legal title in your home is transferred to a trustee, which holds it as security for a loan (debt) between the borrower and lender.


Points are sometime referred to as an origination fee that a lender charges to offset the cost of making a loan.  A “discount point” is a form of pre-paid interest and is paid to get a lower interest rate.


PITI stands for Principal, Interest, Taxes and Insurance. These are the major components of a mortgage payment.


The word “terms” usually refer to the specific details of a loan offer, such as the length of time the borrower has to repay the loan, the amount of down payment required, the loan fee and/or discount points as well as the interest rate.  The “loan term” usually refers to the length of time you have to repay the loan.  Most mortgage terms are for either 15 or 30 years.

Title and Title Insurance

A title or deed is the legal document that proves you are the legal owners of a home.  Title insurance is money paid to do a search of past ownership claims to a piece of property.  It protects a buyer should someone come forward to make a claim to the property (usually because of unpaid taxes or property disputes).

By understanding the most common mortgage terminology, you can eliminate confusion in the home buying process. Remember, your lender is your partner, so don’t hesitate to ask if you have questions about any mortgage terms.  A home loan is the largest investment you will make, so be sure to speak up.  Ask all the questions you need to so you fully understand the home financing process.

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