A mortgage is a loan from a bank or other financial institution that helps a borrower purchase a home. The collateral for the mortgage is the home itself. That means if the borrower doesn’t make monthly payments to the lender and defaults on the loan, the lender can sell the home and recoup its money.

The average homeowner lives in a home for 10 years, according to the 2019 Profile of Home Buyers and Sellers from the National Association of Realtors. This means that, not counting refinances, the typical homeowner is exposed to mortgage jargon once each decade.

That’s not enough to become fluent in the language of home finance. But it’s a good idea to learn as much as you can about mortgages. That way, when loan brokers ask, “Do you want to escrow that?” you will have some idea of what they’re talking about.

Below are some of the terms you’ll run across when applying for and taking out a home mortgage loan.

A Glossary of Common Mortgage Terms

Adjustable rate mortgage. Also called an ARM, this kind of mortgage has an interest rate that changes over time. The change is usually based on a market index.

Amortization. Amortization is the reduction in the amount owed on a mortgage as the payments are made.

Annual percentage rate. Also called the APR, this measures the annual cost of a loan to the borrower and is the best way to compare costs between lenders. It includes mortgage insurance, discount points, loan origination fees and other costs.

Appraisal. An estimate of a property’s value by a professional appraiser, often required by a mortgage lender before making a loan.

Assessed value. The value of a piece of real estate as set by taxing authorities.

Assumable loan. A loan that can be taken over or transferred to a buyer.

Balloon payment. A final, larger than usual payment at the end of a balloon mortgage.

Cash to close. The amount, including down payment and closing costs, a buyer will have to pay at closing.

Cash-out refinance. Also known as a cash-out refi, a mortgage that replaces an existing loan, is larger than the balance on the existing loan and pays out the difference in cash to the borrower.

Closing. The final process, often a meeting in a title company office, during which all documents are signed and fees are paid to consummate the sale of a home.

Closing costs. Fees that the buyer and seller pay during a closing, including origination fees, title search and title insurance premiums.

Closing statement. An itemized list of costs the buyer and seller will pay at closing.

Comps. Recent sales of similar properties used to estimate a property’s fair market value.

Contingency. A clause added to a sales contract that must be satisfied for the transaction to happen. Common contingencies include the house’s passing inspection and a mortgage contingency, which makes the sale contingent on the borrower getting their loan approved.

Conventional loan. A mortgage that is not guaranteed or insured by the federal government.

Credit Score. A number rating a borrower’s creditworthiness. Higher credit scores are more likely to be approved.

Date of possession. The date a buyer is entitled to move into a purchased home.

Debt-to-income ratio. Abbreviated as DTI, a borrower’s total monthly payments on debts including car loans, credit cards and court-ordered child support payments divided by gross monthly pre-tax income and expressed as a percentage. Many lenders recommend the DTI be no more than 43%.

Deed. The legal document that transfers title to a property from one person to another.

Default. When a buyer doesn’t make regular payments on a loan.

Discount points. Money a borrower may pay in advance to reduce the interest rate on the loan. One discount point is equal to 1 percent of the loan value.

Down payment. A portion of the purchase price the borrower pays up front. The higher the down payment, the less risky the loan. A down payment of less than 20% usually means the borrower will have to pay for mortgage insurance.

Earnest money. Earnest money is a deposit offered by a buyer as a token of good faith when an offer on a home is made. It is normally paid when the purchase agreement is signed by the buyer and seller.

Equity. The difference between the value of a home and the outstanding balance on the mortgage.

Escrow. Money paid by a buyer to cover property taxes and insurance. Payments are made monthly and accumulate in an escrow account held by the lender until the taxes or insurance premiums are due. A buyer may choose to pay these costs directly and annually without using escrow.

Fannie Mae. Fannie Mae is a government-sponsored entity (GSE) that lends to mortgage lenders so they can make mortgages to borrowers.

Federal Housing Administration. A federal agency, part of the Department of Housing and Urban Development, which provides mortgage insurance to protect lenders from loss, making it easier for buyers with lower credit scores and lower down payments to qualify for loans. The FHA also sets standards for loan underwriting.

FHA loan. A mortgage insured by the Federal Housing Administration.

First lien. A mortgage that is the senior lien on a property. See Lien.

Fixed-rate mortgage. The most common type of mortgage. It has an interest rate that doesn’t change over the life of the loan, usually 30 or 15 years. The combined total of principal and interest of a fixed-rate mortgage payment also does not vary, although the escrow portion may.

Flood certification. A surveyor’s determination that property is not located in a flood zone. If the certification shows the property is subject to flooding, a flood insurance policy may be required.

Foreclosure. The legal process by which a lender sells the property securing a loan to repay the loan when the borrower defaults.

Freddie Mac. A government-sponsored enterprise (GSE) that buys home mortgages, packages them and sells them to investors.

Good Faith Estimate. A list of costs and fees a lender must give to a borrower within three days of applying for a loan.

Hazard insurance. See Homeowners insurance.

Home equity loan. A home equity loan is a second mortgage secured by the amount of the fair market value of a home that exceeds the balance on the first mortgage.

Home inspection. An examination by a licensed home inspector that is usually required by a mortgage company.

Homeowners insurance. Insurance that protects borrowers and lenders against financial loss due to damage or destruction of the home. Also called hazard insurance.

Interest rate. A fixed or variable rate expressing as a percentage how much a lender is charging to loan the borrower money.

Jumbo loan. A higher-risk loan that is larger than the conventional loan limit. Also called a non-conforming loan.

Lien. A creditor’s legal claim on property a borrower used as security for a debt.

Loan Estimate. A standard form the federal government requires lenders to prepare and give to borrowers to help them compare lenders. It has key elements of the loan, including borrower’s name, property address and loan amount, plus itemized estimates of fees that will be charged.

Loan-to-value. Loan-to-value, abbreviated as LTV, is the ratio of the loan amount to the value of the home securing the loan. The higher the LTV, the riskier the loan.

Mortgage. The legal document that gives the lender a lien on the home or other property as collateral to secure repayment of the loan. Sometimes called a deed of trust or security deed.

Mortgage company. A mortgage lender or mortgage broker. A mortgage lender actually provides the money to the borrower. A broker is a go-between helping buyers find good deals, handling paperwork and collecting a fee.

Mortgage insurance. Insurance that protects lenders if buyers default on loans. Also called private mortgage insurance and abbreviated PMI. FHA loans require a mortgage insurance premium, or MIP, for a similar purpose.

Origination fee. A cost the mortgage lender charges for processing the loan.

P&I. See Principal and interest.

PITI. An abbreviation for principal, interest, taxes and insurance. This is the total amount of the mortgage, not counting any homeowner’s association fees that may also be required.

PMI. See Mortgage insurance.

Preapproval letter. A statement from a mortgage lender to the effect that a borrower has been conditionally approved to borrow a certain amount of money for a home purchase.

Prepaids. Amounts for interest, property taxes, insurance, homeowner’s association fees and other costs that may be required to be paid at closing.

Prepayment penalty. A charge some mortgage lenders apply if a borrower pays off a loan sooner than the terms call for.

Principal. The amount of money borrowed and owed on a mortgage.

Principal and interest. The portion of a monthly mortgage payment that goes to paying interest and reducing the outstanding balance of the loan.

Property taxes. Real estate taxes levied by local taxing authorities.

Real Estate Settlement Procedures Act (RESPA). A 1974 federal law requiring all costs and fees to be disclosed to buyers and sellers.

Refinance. A loan that is used to pay off a preexisting loan using the original property as collateral.

RESPA. See Real Estate Settlement Procedures Act.

Term. The number of years it will take to pay off a mortgage if the minimum payment is made each month. Thirty years is the most common term.

Title. An official document describing who owns a piece of property. A clear title is not encumbered by other liens.

Title insurance policy. An insurance policy that protects parties to a real estate transaction against losses due to a dispute about ownership.

Title search. Research a title company does to discover any outstanding liens on a property before it can be sold.

Underwriting. The process of evaluating a borrower’s creditworthiness before approving an application for a mortgage.

Uniform Residential Loan Application. Also called a Form 1003, a standard mortgage loan application.

VA loan. A mortgage guaranteed by the Department of Veterans Affairs that is available as a benefit to military veterans.

Walk-through. A physical inspection of a property by a buyer, usually performed just before closing.

Warranty deed. A document stating that there are no preexisting liens on a property so that the owner can sell it to a buyer.

Wire transfer. The preferred method for transferring money from one bank account to another to settle real estate closings.