20 Mortgage Terms You Should Know: Helpful Information for First Time Homebuyers

When you’re about to buy a home, the process has many moving parts. Getting your mortgage can be one of the more confusing aspects, and industry language contributes to the muddle for first-time homebuyers. But once you understand the lingo, the mortgage process will be easier to navigate. Here are 20 mortgage terms first-time homebuyers will want to know.

Appraisal

This is an estimate of a home’s worth. You must appraise a home before getting a home loan because lenders want to know that they are only giving you what you need. It’s also one step in their risk assessment.

Appreciation

Appreciation means that a property’s value increases over time.

Adjustable-Rate Mortgage (ARM)

A mortgage with an ARM has a set amount of time where the interest rate will not change. After that time is up, the interest rate is subject to change. You’ll see ARMs expressed in figures like 5-1 or 3-2-1. That refers to how many years a specific interest rate will be in place. The rates may also vary according to changes in a financial index associated with the loan.

Annual Percentage Rate (APR)

Your APR measures how much it costs to borrow money over that year. It includes interests, financing charges, and fees.

Balloon Loan

A balloon loan begins with low payments over a certain length of time. After that time is up, payments will become very high.

Broker

This is a third party who assists in negotiating the contract between buyer and seller or organizes the funding. They are not responsible for actually lending money.

Cap

This limits how much variable interest can increase on a loan. An annual cap limits the amount that interest can grow over a certain year, while a lifetime cap limits the amount it can increase for the loan’s duration.

Debt-to-Income Ratio (DTR or DTI)

Your DTR or DTI measures how much of your income goes towards paying your debts. It’s calculated by dividing your overall debt by your income. The higher the ratio, the more risky it is for a lender to loan you money and the more difficult it will be to get a loan.

Down Payment

This is the initial payment you make on your home. Usually, you will be expected to pay between 3% and 20% of your home’s value as the down payment. That money will be your initial equity in the home.

Fannie Mae (FNMA)

This government-sponsored enterprise sets guidelines for conforming loans and ensures homeowners can pay for their homes.

Fixed-Rate Mortgage

In these mortgages, the interest remains the same over the entire life of the loan.

Freddie Mac (FHLMC)

Like Fannie Mae, this is another government-sponsored enterprise that sets the guidelines for conforming loans and ensures homeowners can pay for their homes.

Loan-to-Value Ratio (LTV)

This is the ratio between the amount left unpaid on the loan and the home’s appraised value. A lower LTV shows that you’ve made a larger down payment.

Maturity Date

This is when all a loan’s principal, interest, and fees must be or are projected to be repaid.

Mortgage Insurance

This protects the lender if your loan defaults. Private mortgage insurance (PMI) may be required if your down payment is under 20%.

Prepayment

This is making a payment on your loan’s principal before it’s due to reduce your overall principal balance.

Principal

This is the amount currently owed on a mortgage, not including interest.

Seller Concessions

These clauses are included with a home offer requesting the seller to do something for a buyer, such as pay some closing costs, include a home warranty, or make specific home repairs.

Third-Party Fees

These are fees that you may have to pay in the buying process in addition to those paid to the lender. Appraisal fees, title certifications, and flood certifications are examples of third-party fees.

Underwriter

This person will approve or deny your mortgage according to the lender’s underwriting and approval terms. They assessed your financial stability as a borrower and the lender’s risk of loaning you money.

Get Your Burning Mortgage Questions Answered!

This is not every single term you’ll hear related to your mortgage, but it’s a good start. If you’ve heard other mortgage terms you’re unsure about, don’t hesitate to ask. Our real estate experts are always happy to help first-time homebuyers!

Updated March 2024