Mortgage glossary
This glossary explains every term on your Mortgage Plan and your loan documents in plain words.
Loan basics
- Loan type
- The loan program: Conventional, FHA, USDA or VA. Each has its own rules for down payment, mortgage insurance and funding fees.
- VA loan
- A home loan guaranteed by the Department of Veterans Affairs for eligible veterans, service members and some surviving spouses. If you qualify, it is often the best option: no down payment with full entitlement, no monthly mortgage insurance and typically lower rates.
- Loan term
- How many years it takes to pay the loan off with the regular payment.
- Loan amount
- The amount you borrow. On FHA, USDA and VA loans it includes the upfront fee that is financed in.
- Down payment
- Price minus the loan: the cash you put toward the home itself. Closing costs are separate.
- Equity
- The home's value minus what you owe. It grows as you pay the balance down and as the value rises.
- Loan-to-value (LTV)
- The loan as a percentage of the home's value. 3% down is 97% LTV. Conventional mortgage insurance can come off at 80% and ends at 78%.
- Amortization
- The schedule that pays the loan off: the same payment each month, with the interest share shrinking and the principal share growing.
Rate and points
- Interest rate
- The yearly rate used to calculate principal and interest. It is the rate on your loan documents.
- APR
- Annual percentage rate: the rate plus certain lender fees and points, as one yearly figure. Useful for comparing loans with different fees. Your payment comes from the rate, not the APR.
- Discount points
- Money paid at closing to lower the rate. One point is 1% of the loan. Points raise closing costs and lower the payment.
- Rate lock
- The lender's commitment to a rate for a set period, usually 30 to 60 days, while the loan is processed.
- Lender credit
- The opposite of points: you take a slightly higher rate, and the lender pays part of your closing costs.
Monthly payment
- Total monthly payment
- Principal and interest plus property tax, homeowners insurance and any mortgage insurance (PITI). HOA dues are not included.
- Principal and interest
- The part of the payment that repays the loan (principal) and pays for borrowing (interest). On a fixed-rate loan it never changes.
- PITI
- Principal, interest, taxes and insurance: the full house payment lenders use when they qualify you.
- Property tax
- The county's yearly tax on the home, collected monthly into escrow.
- Homeowners insurance
- Insurance on the home and its contents. The first year is paid at closing; after that it is collected monthly into escrow.
- Cost per $1,000 borrowed
- The monthly payment for every $1,000 of loan. Lower means each borrowed dollar costs less.
Mortgage insurance
- Mortgage insurance
- Protects the lender when the loan is over 80% of the value. Conventional MI can be removed at 20% equity; FHA and USDA have their own premiums; VA has none.
- Upfront MIP / funding fee
- A one-time charge on FHA (1.75%), USDA (1%) and VA loans (varies by down payment and use, and none for veterans who receive VA disability compensation), usually financed into the loan.
Closing costs
- Cash to close
- Down payment plus closing costs minus any credits: the cash you bring. On a refinance, costs minus anything financed; negative means cash back.
- Closing costs
- Lender and title fees, prepaids and points. Not the down payment.
- Credits
- Money that lowers your cash to close: a seller credit or down payment assistance.
- Seller credit
- Money the seller puts toward your closing costs. It cannot go toward the down payment, and each loan program caps it.
- Down payment assistance (DPA)
- Program help with the down payment or closing costs. Most is a second loan secured by a lien on the home and repaid when you sell or refinance; some is a grant. If the loan has a payment, it is in your monthly total.
- Underwriting fee
- The lender's fee for reviewing, verifying and approving the file.
- Appraisal fee
- Paid to an independent appraiser to confirm the home's value.
- Flood determination fee
- A check of federal flood maps. A home in a flood zone needs flood insurance.
- Tax service fee
- Sets up monitoring of your property tax payments for the life of the loan.
- Credit report fee
- The cost of ordering your credit reports and scores.
- Recording fees
- County fees to record the deed and the deed of trust in public records.
- Colorado transfer tax
- Colorado's documentary fee: one cent per $100 of the price.
Title fees
- Closing protection letter (CPL)
- The title underwriter's guarantee to the lender covering the closing agent's handling of funds and documents.
- Document preparation
- The title company's fee for preparing the closing documents.
- Lender's title insurance
- Protects the lender against problems with the home's title. An owner's policy, which protects you, is separate and usually paid by the seller in Colorado.
- Settlement fee
- The title company's fee for conducting the closing and disbursing the funds.
- Tax certificate
- A county certificate showing the property's tax status and anything owed.
Prepaids and escrow
- Escrow account
- An account the servicer uses to pay your property tax and insurance. Part of each payment goes into it.
- Escrow deposit
- A few months of tax and insurance put into the escrow account at closing so the first bills can be paid. It is your money, set aside, not a fee.
- Escrow waiver
- Paying tax and insurance yourself instead of through the servicer. Lowers the payment and the closing deposit; usually needs 20% down.
- Prepaids
- Bills paid ahead at closing: the first year of insurance, interest to the end of the closing month, and the escrow deposit. You would pay them with any lender.
- Per diem interest
- Interest from the closing day to the end of that month, paid at closing. Closing later in the month means less of it.
Qualifying
- Debt-to-income (DTI)
- House payment plus other monthly debts, divided by gross monthly income. The main ratio lenders use.
- DTI guideline
- The debt-to-income line each program draws. Conventional: 50% at most with Fannie Mae's automated approval. FHA: no fixed maximum with an automated approval. VA: no maximum; 41% is the standard, and above it residual income decides. USDA: a 41% guideline, with automated approval or a waiver up to 44% above it.
- Front-end ratio
- House payment divided by gross monthly income.
- Reserves
- Assets left after cash to close, counted in months of the new payment.
- Gross income
- Pay before taxes and deductions. All qualifying ratios use it.
Comparing options
- Break-even
- How long until the interest and mortgage insurance saved each month add up to the extra closing cost. It is based on interest saved, not just the payment difference.
- Payback
- When one option's extra up-front cost is earned back through lower interest and mortgage insurance than another option, or how long an option with a lower up-front cost stays less expensive.
- Return on the down-payment difference
- When two options differ only in down payment: what the extra cash saves each year, as a percentage of that cash.
- Total cost
- Closing costs, any upfront fee, interest and mortgage insurance over a period. Down payment and principal are not costs.
Refinancing
- Rate-and-term refinance
- A new loan of about the same size to get a better rate or term.
- Cash-out refinance
- A new loan larger than what you owe; the difference comes to you at closing. Rates run slightly higher and the loan is usually capped at 80% of value.
- Recoup
- How long the monthly saving takes to pay back the cost of the refinance.
- Clock reset
- A new 30-year loan can run 30 years from the start. If the old loan had 24 years left, the new one can run 6 years longer. That is a limit, not a schedule: paying extra principal, such as your old payment amount, pays it off sooner.
- Payoff
- The amount needed to close the old loan: the balance plus interest to the payoff date. The new loan pays it.
See these terms with your own numbers
Your Mortgage Plan puts the payment, cash to close and cost over time of every loan that fits side by side.