Loan & Mortgage Glossary
Loan paperwork is full of terms that sound more complicated than they are. This glossary covers the ones you are most likely to encounter when borrowing for a home, car, education, or business.
A
- Amortization
- The process of paying off a loan through regular installments over time. Each payment covers both interest and a portion of the principal balance. Early in the loan, most of the payment goes toward interest. As the balance shrinks, more of each payment applies to principal. Try the calculator →
- Annual Percentage Rate (APR)
- The total yearly cost of borrowing, expressed as a percentage. APR includes the interest rate plus fees like origination charges and discount points. It gives a more complete picture of loan cost than the interest rate alone, and lenders are required by law to disclose it. Try the calculator →
- Adjustable-Rate Mortgage (ARM)
- A mortgage with an interest rate that changes after an initial fixed period. A 5/1 ARM, for example, has a fixed rate for the first five years, then adjusts once a year based on a market index. ARMs usually start with lower rates than fixed-rate mortgages but carry the risk of future payment increases. Try the calculator →
B
- Balloon Payment
- A large lump-sum payment due at the end of a loan term. Some loans have lower monthly payments throughout the term but require the remaining balance to be paid in full on a specific date. Balloon payments are common in commercial real estate and some business loans.
- Bridge Loan
- A short-term loan used to cover a gap between two transactions. In real estate, a bridge loan lets a buyer purchase a new property before selling their current one. These loans typically last 6 to 12 months and carry higher interest rates than conventional mortgages. Try the calculator →
C
- Closing Costs
- Fees paid when finalizing a mortgage or real estate transaction. Closing costs typically run 2% to 5% of the loan amount and include appraisal fees, title insurance, attorney fees, recording fees, and prepaid items like property taxes and homeowners insurance. Try the calculator →
- Collateral
- An asset that a borrower pledges to a lender as security for a loan. If the borrower stops making payments, the lender can seize the collateral. A home backs a mortgage, and a vehicle backs an auto loan. Loans backed by collateral are called secured loans.
- Conventional Loan
- A mortgage that is not insured or guaranteed by a government agency. Conventional loans are offered by banks, credit unions, and online lenders. They typically require a credit score of at least 620 and a down payment of 3% to 20%. Borrowers who put down less than 20% usually pay private mortgage insurance (PMI). Try the calculator →
- Credit Score
- A three-digit number (typically 300 to 850) that represents your creditworthiness. Lenders use it to decide whether to approve your loan and what interest rate to charge. Scores above 740 generally qualify for the best rates. The most widely used scoring models are FICO and VantageScore.
D
- Debt Consolidation
- Combining multiple debts into a single loan, usually to get a lower interest rate or a single monthly payment. A common approach is taking out a personal loan to pay off credit card balances. This works best when the new loan rate is lower than the average rate on the existing debts. Try the calculator →
- Debt Service Coverage Ratio (DSCR)
- A measure of whether a property generates enough rental income to cover its mortgage payment. DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.25 means the property earns 25% more than the loan payment requires. Lenders typically want a DSCR of at least 1.0 to 1.25. Try the calculator →
- Debt-to-Income Ratio (DTI)
- The percentage of your gross monthly income that goes toward debt payments. Lenders use DTI to assess whether you can handle additional borrowing. Most mortgage lenders want a DTI below 43%, though some loan programs allow up to 50%. DTI includes your mortgage, auto loans, student loans, minimum credit card payments, and other monthly obligations. Try the calculator →
- Default
- Failure to repay a loan according to its terms. For most loans, default occurs after missing several consecutive payments (often 90 to 120 days). Defaulting damages your credit score and can lead to collection actions, wage garnishment, or foreclosure on secured loans.
- Down Payment
- The upfront cash a buyer pays toward a purchase, with the remainder financed by a loan. For homes, down payments typically range from 0% (VA and USDA loans) to 20% or more. A larger down payment reduces the loan amount, lowers monthly payments, and may eliminate the need for mortgage insurance. Try the calculator →
E
- Equity
- The difference between what your property is worth and what you owe on it. If your home is worth $400,000 and you owe $280,000, you have $120,000 in equity. Equity builds as you make payments and as property values increase. You can tap equity through a home equity loan or HELOC. Try the calculator →
- Escrow
- An account managed by your mortgage servicer that holds funds for property taxes and homeowners insurance. A portion of each monthly payment goes into the escrow account, and the servicer pays those bills on your behalf when they come due. This ensures taxes and insurance stay current.
F
- FHA Loan
- A mortgage insured by the Federal Housing Administration. FHA loans are popular with first-time buyers because they allow credit scores as low as 580 with a 3.5% down payment. The trade-off is mandatory mortgage insurance premiums (MIP) for the life of the loan if you put down less than 10%. Try the calculator →
- Fixed-Rate Mortgage
- A mortgage with an interest rate that stays the same for the entire loan term. The monthly principal and interest payment never changes, making budgeting predictable. The most common fixed-rate terms are 15 and 30 years. Fixed rates are typically higher than initial ARM rates but eliminate the risk of future rate increases. Try the calculator →
- Forbearance
- A temporary pause or reduction in loan payments granted by a lender during financial hardship. Interest usually continues to accrue during forbearance, and the missed payments must be repaid later. Forbearance is not forgiveness; it postpones payments rather than eliminating them.
- Foreclosure
- The legal process by which a lender takes ownership of a property after the borrower defaults on the mortgage. Foreclosure timelines vary by state but typically take several months to over a year. It severely damages your credit score and remains on your credit report for seven years.
G
- Grace Period
- A window of time after a payment due date during which no late fee is charged. Most mortgages have a 15-day grace period. Credit cards typically offer a grace period on new purchases if the previous balance was paid in full. Student loans may have a grace period after graduation before repayment begins.
H
- Hard Money Loan
- A short-term loan from a private lender, secured by real estate. Hard money loans are used primarily by real estate investors for fix-and-flip projects or bridge financing. They fund quickly (often within days) but carry high interest rates, typically 8% to 15%, plus origination fees of 1 to 5 points. Try the calculator →
- HELOC (Home Equity Line of Credit)
- A revolving line of credit secured by your home equity. A HELOC works like a credit card: you draw funds as needed during a set period (usually 10 years), then repay over a repayment period (usually 10 to 20 years). HELOCs typically have variable interest rates. Try the calculator →
- Home Equity Loan
- A lump-sum loan secured by the equity in your home. Unlike a HELOC, a home equity loan has a fixed interest rate and fixed monthly payments. These loans are commonly used for home improvements, debt consolidation, or large expenses. You can typically borrow up to 80% to 85% of your equity. Try the calculator →
I
- Income-Driven Repayment (IDR)
- A set of federal student loan repayment plans that cap monthly payments based on your income and family size. The four IDR plans are IBR, PAYE, REPAYE (now called SAVE), and ICR. Remaining balances are forgiven after 20 or 25 years of qualifying payments, though the forgiven amount may be taxable. Try the calculator →
- Interest Rate
- The cost of borrowing money, expressed as a percentage of the loan balance per year. A 6% rate on a $300,000 mortgage means you pay roughly $18,000 in interest during the first year (the exact amount varies with amortization). Interest rates can be fixed or variable.
J
- Jumbo Loan
- A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). In most U.S. counties, the 2025 conforming limit is $806,500. Jumbo loans are used for higher-priced properties and typically require larger down payments, higher credit scores, and more cash reserves. Try the calculator →
L
- Loan-to-Value Ratio (LTV)
- The loan amount divided by the appraised value of the property, expressed as a percentage. A $320,000 loan on a $400,000 home is an 80% LTV. Lenders use LTV to assess risk. Higher LTVs mean higher risk, which can result in higher rates or mortgage insurance requirements. Try the calculator →
N
- Negative Amortization
- A situation where monthly payments are too low to cover the interest due, causing the loan balance to grow over time instead of shrinking. This can happen with certain adjustable-rate mortgages or payment-option loans. Negative amortization increases total borrowing costs and can lead to owing more than the property is worth.
O
- Origination Fee
- A one-time charge from a lender to process and underwrite a loan. Origination fees typically range from 0.5% to 1% for mortgages and 1% to 8% for personal loans. The fee is usually deducted from the loan proceeds or added to closing costs. Try the calculator →
P
- Points (Discount Points)
- Prepaid interest that you pay at closing to reduce your mortgage rate. One point equals 1% of the loan amount. Paying one point on a $300,000 loan costs $3,000 and typically reduces the rate by about 0.25%. Points make sense if you plan to keep the loan long enough for the monthly savings to exceed the upfront cost.
- Pre-Approval
- A lender's conditional commitment to lend you a specific amount based on a review of your credit, income, and assets. Pre-approval is stronger than pre-qualification and usually involves a hard credit pull. Sellers often prefer offers from pre-approved buyers because it signals the buyer can likely secure financing.
- Prepayment Penalty
- A fee charged by some lenders if you pay off a loan before the scheduled end date. Prepayment penalties are less common today than in the past and are prohibited on many loan types, including FHA and VA mortgages. Always ask about prepayment terms before signing a loan agreement.
- Principal
- The original amount borrowed, or the remaining balance that has not yet been repaid. When you make a loan payment, part goes toward interest and part goes toward reducing the principal. Paying down principal faster (through extra payments) reduces total interest cost and shortens the loan term. Try the calculator →
- Private Mortgage Insurance (PMI)
- Insurance that protects the lender if a borrower defaults on a conventional mortgage with less than 20% down. PMI typically costs 0.5% to 1.5% of the loan amount per year and is added to the monthly payment. You can request PMI removal once your LTV reaches 80%, and it automatically cancels at 78% LTV. Try the calculator →
R
- Refinancing
- Replacing an existing loan with a new one, usually to get a lower interest rate, change the loan term, or switch from an adjustable rate to a fixed rate. Refinancing involves closing costs (typically 2% to 5% of the loan), so it only makes financial sense if the savings outweigh those costs over the time you plan to keep the loan. Try the calculator →
S
- SBA Loan
- A loan partially guaranteed by the U.S. Small Business Administration. The SBA doesn't lend directly; instead, it guarantees a portion of loans made by approved banks and lenders. This reduces the lender's risk and results in more favorable terms for small businesses. Common programs include the 7(a), 504, Express, and Microloan programs. Try the calculator →
- Secured Loan
- A loan backed by collateral that the lender can seize if you default. Mortgages, auto loans, and home equity loans are secured loans. Because the lender has recourse to an asset, secured loans typically carry lower interest rates than unsecured loans.
T
- Term
- The length of time you have to repay a loan. Mortgage terms are commonly 15 or 30 years. Auto loan terms range from 36 to 84 months. Shorter terms mean higher monthly payments but less total interest. Longer terms lower the monthly payment but increase the total cost of borrowing.
- Title Insurance
- Insurance that protects against financial loss from defects in a property's title, such as liens, encumbrances, or ownership disputes. Lender's title insurance is required for most mortgages. Owner's title insurance is optional but recommended. It is a one-time fee paid at closing.
U
- Underwriting
- The process a lender uses to evaluate a loan application and assess risk. Underwriters review your credit report, income documentation, employment history, assets, and the property appraisal. The underwriter ultimately decides whether to approve, deny, or conditionally approve the loan.
- Unsecured Loan
- A loan that is not backed by collateral. Personal loans and credit cards are common unsecured loans. Because the lender has no asset to seize in case of default, unsecured loans carry higher interest rates than secured loans. Approval depends heavily on your credit score and income. Try the calculator →
- USDA Loan
- A mortgage guaranteed by the U.S. Department of Agriculture for homes in eligible rural and suburban areas. USDA loans offer 0% down payment for borrowers who meet income limits (typically 115% of area median income). They have lower mortgage insurance costs than FHA loans. Try the calculator →
V
- VA Loan
- A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. VA loans require 0% down payment and have no private mortgage insurance. They do charge a one-time funding fee, which varies by down payment amount and service history. Try the calculator →
- Variable Rate
- An interest rate that can change over the life of a loan, usually tied to a benchmark index like the prime rate or SOFR. When the index rises, your rate and payment go up. When it falls, they go down. Variable rates often start lower than fixed rates but carry the risk of increasing over time. Try the calculator →