Mortgage & finance glossary
Definitions for the terms that show up in the calculators and guides. Each entry links to the tool that uses the concept.
5
529 plan
A tax-advantaged investment account for education costs: contributions grow tax-deferred and withdrawals are tax-free when spent on qualified tuition, fees, room, board, and books. Non-qualified withdrawals owe ordinary income tax plus a 10% penalty on the earnings portion.
A
Adjustable-rate mortgage (ARM)
A mortgage whose interest rate is fixed for an introductory period — commonly 5, 7, or 10 years — then adjusts periodically against a published index plus a margin. Payments can rise or fall after the fixed period, subject to per-adjustment and lifetime caps.
Amortization
The process of paying off a loan through fixed periodic payments, where each payment covers the interest accrued that period and applies the remainder to the principal balance. Early payments are mostly interest; later payments are mostly principal.
Amortization schedule
A table listing every payment over a loan's life, split into principal and interest, with the running balance after each payment. It shows exactly when the loan crosses from mostly-interest to mostly-principal.
Annual percentage rate (APR)
A broader cost-of-borrowing figure than the note rate: it folds most lender fees, discount points, and mortgage insurance into a single yearly percentage. APR lets you compare loan offers on a more equal footing, though it assumes you keep the loan to term.
Annual percentage yield (APY)
The effective yearly return on a deposit account once compounding is included. A 4.9% rate compounded monthly is roughly a 5.01% APY; APY is the number to compare across savings accounts and CDs.
Appraisal
A licensed appraiser's independent estimate of a property's market value, ordered by the lender. If the appraisal comes in below the contract price, the lender sizes the loan off the lower figure, and the buyer must cover the gap or renegotiate.
Assessed value
The value a county assessor assigns to a property for tax purposes, which may lag or trail market value and is often a fixed percentage of it (the assessment ratio). Property tax is the assessed value, minus exemptions, times the combined local rate.
B
Back-end DTI
Total monthly debt payments — the full housing payment plus car loans, student loans, and minimum credit-card payments — divided by gross monthly income. Conventional underwriting generally wants this at or below 36%, with some programs allowing 43–50%.
Balloon payment
A large lump sum due at the end of a loan whose regular payments were too small to retire the balance. Balloon structures are rare in modern consumer mortgages but appear in some seller-financed and commercial loans.
Biweekly mortgage
A payment plan where you pay half the monthly amount every two weeks. Because there are 26 half-payments a year, you make the equivalent of 13 monthly payments instead of 12, which shortens a 30-year loan by roughly four to five years.
C
Capitalized interest
Unpaid interest that gets added to a loan's principal balance, so future interest accrues on the larger amount. It typically happens on an unsubsidized student loan when accrued interest isn't paid during school or a deferment and is rolled in once repayment starts.
Cash-out refinance
A refinance for more than you currently owe, with the difference paid to you in cash and added to the loan balance. It taps equity at first-mortgage rates but raises your LTV and monthly payment.
Closing costs
The one-time fees paid to complete a home purchase or refinance — lender origination charges, appraisal, title insurance, recording fees, prepaid taxes and insurance, and escrow setup. They typically run 2–5% of the loan amount.
Closing Disclosure
The five-page form the lender must deliver at least three business days before closing, itemizing the final loan terms, monthly payment, and all closing costs. Compare it line by line against your Loan Estimate.
Compound interest
Interest calculated on both the original principal and the interest already added to it, so a balance grows faster the longer it compounds. It works for you in a savings or investment account and against you on revolving debt.
Conforming loan
A conventional mortgage that meets the size limit and underwriting rules set by Fannie Mae and Freddie Mac, making it eligible for purchase by them. The 2025 baseline limit is $806,500 for a one-unit home, higher in expensive counties.
Contingency
A condition written into a purchase contract that must be met or the buyer can walk away with their earnest money. Common ones cover financing, the home inspection, and the appraisal.
Conventional loan
A mortgage not insured or guaranteed by a government agency (FHA, VA, USDA). Conventional loans allow private mortgage insurance to be removed once you reach 20% equity, unlike most FHA loans.
Cosigner
Someone who signs onto a private student loan (or other loan) with the borrower and becomes equally responsible for repaying it. Most undergraduates without an established credit history need one to qualify or to get a competitive rate.
Coverdell ESA
A tax-advantaged education savings account capped at $2,000 per beneficiary per year across all Coverdell accounts, in exchange for self-directed investment choices and, unlike a 529, broad coverage of K-12 expenses beyond tuition alone. Contributions phase out for higher earners.
D
Debt-to-income ratio (DTI)
The share of your gross monthly income consumed by debt payments. Lenders look at two versions: front-end (housing only) and back-end (all debt). It is the single biggest lever in how much a lender will let you borrow.
Direct Consolidation Loan
A federal loan that pays off multiple federal student loans and replaces them with one new loan, one servicer, and one monthly payment. Its rate is the balance-weighted average of the old loans' rates, rounded up to the nearest 1/8 of a point — never lower than what you already had.
Discount point
A prepaid fee equal to 1% of the loan amount that buys a lower interest rate, usually by about 0.25 percentage points per point. Points pay off only if you keep the loan past the break-even month.
Down payment
The portion of the purchase price you pay in cash up front. A larger down payment lowers the loan amount, can eliminate mortgage insurance at 20%, and often earns a slightly better rate.
E
Earnest money
A good-faith deposit — commonly 1–3% of the price — the buyer puts into escrow when an offer is accepted. It is credited toward the down payment at closing, or forfeited if the buyer backs out for a reason not protected by a contingency.
Effective property tax rate
Annual property tax paid divided by the home's market value, expressed as a percent. It rolls every overlapping levy — county, city, school district, special districts — into one comparable number, and ranges from about 0.3% to over 2% across the U.S.
Escrow account
An account the loan servicer uses to hold and pay your property taxes and homeowners insurance. You pay one-twelfth of the annual total with each mortgage payment, and the servicer disburses the bills when due. Shortfalls trigger an annual escrow adjustment.
F
FHA loan
A mortgage insured by the Federal Housing Administration, allowing down payments as low as 3.5% and more lenient credit requirements. The trade-off is a mortgage insurance premium that, on most FHA loans since 2013, lasts the life of the loan unless you refinance out.
Fixed-rate mortgage
A mortgage whose interest rate — and therefore whose principal-and-interest payment — never changes for the entire term. The 30-year and 15-year fixed are the two most common forms in the U.S.
Forbearance
A lender's temporary agreement to pause or reduce mortgage payments during a documented hardship. Payments are not forgiven — the missed amounts are repaid later as a lump sum, a repayment plan, or added to the loan balance.
Front-end DTI
The full monthly housing payment — principal, interest, taxes, insurance, and any HOA dues — divided by gross monthly income. Conventional guidance keeps this at or below 28%.
G
Grace period
A window after leaving school — six months for most federal student loans — before payments must begin. Interest keeps accruing on unsubsidized loans during it, and any that accrued capitalizes onto the balance once repayment starts.
H
Home equity
The part of the home's value you actually own: current market value minus every loan secured by the property. It grows as you pay down principal and as the home appreciates.
Home equity line of credit (HELOC)
A revolving credit line secured by your home equity, usually with a variable rate and a draw period followed by a repayment period. You borrow only what you need and pay interest only on the drawn balance.
Home equity loan
A fixed-rate, lump-sum second mortgage against your equity, repaid on its own amortization schedule. Unlike a HELOC, the rate and payment are set at closing.
Homestead exemption
A reduction in the taxable value of an owner-occupied primary residence, which lowers the property tax bill. The amount and rules vary by state and county; some also cap how fast assessed value can rise.
I
Income-driven repayment (IDR)
A federal student loan repayment plan that sets the monthly payment as a percentage of discretionary income rather than a fixed amortization schedule, with any remaining balance forgiven after a set number of years. Only available on federal loans — private lenders don't offer it.
Index rate
The published benchmark an adjustable-rate mortgage tracks — commonly SOFR or the Constant Maturity Treasury. After the fixed period, your rate resets to the current index plus a fixed margin, within the loan's caps.
Interest
The cost of borrowing, charged as a percentage of the outstanding principal. On an amortizing mortgage, interest is calculated on the remaining balance each month, so it shrinks as the balance falls.
Interest rate (note rate)
The percentage used to calculate the interest portion of each payment. It is not the same as APR, which also includes fees. The note rate alone determines your principal-and-interest payment.
J
Jumbo loan
A mortgage larger than the conforming loan limit for its county, so it can't be sold to Fannie Mae or Freddie Mac. Jumbo loans usually require stronger credit, larger reserves, and sometimes a larger down payment.
L
Loan Estimate
A standardized three-page form the lender must provide within three business days of your application, showing the estimated rate, monthly payment, and closing costs. Use it to compare competing offers.
Loan-to-value ratio (LTV)
The loan amount divided by the property's value, as a percent. An 80% LTV (20% down) is the threshold below which private mortgage insurance is generally not required on a conventional loan.
M
Margin
The fixed percentage a lender adds to the index rate to set an adjustable-rate mortgage's rate after the fixed period. The margin is disclosed up front and does not change over the life of the loan.
Mortgage insurance premium (MIP)
The mortgage insurance charged on FHA loans: an upfront premium of 1.75% of the loan plus an annual premium collected monthly. On most FHA loans it lasts the life of the loan unless you refinance to a conventional mortgage.
Mortgage recast
Re-amortizing an existing loan after a large lump-sum principal payment, so the monthly payment drops while the rate and payoff date stay the same. It is much cheaper than a refinance but not all loans or servicers allow it.
O
Origination fee
The lender's charge for processing and underwriting the loan, often about 0.5–1% of the loan amount. It appears on the Loan Estimate and is part of both closing costs and the APR calculation.
P
Parent PLUS loan
A federal loan a parent (not the student) borrows to cover a dependent undergraduate's remaining costs, up to the full cost of attendance. It requires a credit check for adverse history, carries a higher rate and origination fee than a student's own federal loans, and is the parent's legal obligation to repay.
PITI
Principal, Interest, Taxes, and Insurance — the four parts of a typical monthly mortgage payment when taxes and insurance are escrowed. Lenders use PITI, plus any HOA dues, as the housing figure in your DTI.
Pre-approval
A lender's conditional commitment to lend up to a stated amount, based on a verified review of your income, assets, and credit. It is stronger than a pre-qualification and signals to sellers that your financing is solid.
Prepayment penalty
A fee some loans charge if you pay off the balance early, whether by selling, refinancing, or making large extra payments. Federally backed and most conventional mortgages made today do not carry one, but always confirm.
Principal
The amount of money actually borrowed and still owed, separate from the interest charged to borrow it. Each mortgage payment reduces the principal by a little more than the last.
Private mortgage insurance (PMI)
Insurance that protects the lender, not you, when a conventional loan's down payment is under 20%. It typically costs 0.3–1.5% of the loan per year and, by law, must be cancelled once the loan reaches 78% of the original value.
Public Service Loan Forgiveness (PSLF)
A federal program that forgives a borrower's remaining Direct Loan balance after 120 qualifying monthly payments made while working full-time for a government or qualifying nonprofit employer. Only certain repayment plans count toward the 120, and forgiven amounts under PSLF aren't taxed.
R
Rate cap
The limit on how much an adjustable-rate mortgage's rate can move. A 2/2/5 structure means at most 2 points at the first adjustment, 2 points at each later adjustment, and 5 points above the start rate over the life of the loan.
Rate lock
A lender's guarantee to hold a quoted interest rate for a set window — often 30 to 60 days — while your loan is processed. If the lock expires before closing, you take whatever the market rate is then, unless you pay to extend.
Refinance
Replacing your current mortgage with a new one, usually to get a lower rate, change the term, or convert an ARM to a fixed rate. It resets closing costs and the amortization clock, so the break-even point matters.
S
Subsidized loan
A federal student loan (available only to undergraduates with financial need) where the government pays the interest while you're in school at least half-time, during the grace period, and during deferment. Nothing capitalizes onto the balance during those windows, unlike an unsubsidized loan.
T
Title insurance
A one-time policy that protects against defects in the property's ownership history — liens, forgeries, errors in public records. A lender's policy is required; an owner's policy is optional but usually worth it.
U
Underwriting
The lender's formal review of your income, assets, credit, and the property appraisal to decide whether — and on what terms — to approve the loan. It is where documentation gaps and DTI limits get tested.
Unsubsidized loan
A federal student loan open to undergraduates and graduate students regardless of financial need, where interest accrues from disbursement and capitalizes onto the balance once repayment starts — unlike a subsidized loan, where the government covers interest while you're in school.