Mortgage terms, plainly defined

Appraisal

An independent opinion of what the property is worth, ordered by the lender. It exists to confirm the home supports the amount being lent — it is not an inspection and it is not there to find faults.

APRalso called Annual percentage rate

A single figure that folds the interest rate together with certain costs of getting the loan, so two offers can be compared on more than the rate alone. It is usually higher than the interest rate, and that is normal rather than a catch.

Cash to close

The total amount you need to bring on closing day. It includes your down payment as well as closing costs, which is why it is a bigger number than the costs alone.

Closing costs

What it costs to complete the transaction, separate from your down payment: lender charges, title and escrow fees, recording fees, and prepaid items such as taxes and insurance.

Closing Disclosure

The document setting out your final loan terms and costs, given to you in advance of signing so there is time to read it and query anything. Compare it against the Loan Estimate you were given earlier.

DTIalso called Debt-to-income ratio

What you owe each month compared with what you earn each month. Lenders look at it closely because it is a better predictor of comfort than income on its own. What is acceptable varies by program.

Earnest money

A deposit submitted with your offer to show you are serious. It is normally credited toward what you owe at closing rather than being an extra cost.

Escrow

Two related things. Before closing, a neutral third party holds the funds and documents and handles the transfer. After closing, an escrow account collects money with your monthly payment to pay property taxes and insurance on your behalf.

Interest rate

The rate used to calculate the interest portion of your payment. It is not the same as APR, and it is only one part of what a loan costs.

Loan Estimate

A standardised form your lender must give you after you apply, setting out the terms and estimated costs. Every lender uses the same layout, which is what makes offers genuinely comparable.

Mortgage insurancealso called PMI

Insurance that protects the lender, not you, and is commonly required when the down payment is below a certain level. Whether it applies, what it costs, and whether it ever falls away all depend on the program.

Points

An optional upfront payment to reduce your interest rate. One point is one percent of the loan amount — that is what the word means. Whether paying points is worth it depends on how long you keep the loan.

Pre-approval

A lender has checked your credit and verified your documents, and has stated what they are prepared to lend. It is what a seller expects to see with an offer. It is not a loan and not an obligation to buy.

Principal

The amount you actually borrowed, and still owe. Each monthly payment is split between principal and interest — early on, more of it goes to interest.

Underwriting

The review where someone verifies your income, assets, credit, and the property, and decides whether the loan can be approved as written. Being asked for more documents here is routine, not a warning sign.

Two of these — the Loan Estimate and the Closing Disclosure — are documents you will actually be handed. There is a fuller walkthrough of the Loan Estimate here.