15 Mortgage Terms Explained in Plain English

Buying a home comes with a lot of unfamiliar terminology, especially for first-time homebuyers. Mortgage terms can quickly become overwhelming if you’re new to the process.

At Northpoint Mortgage, we believe informed homebuyers make more confident decisions. That’s why we created this guide to explain common mortgage terms in simple, easy-to-understand language. Whether you’re preparing to buy your first home, exploring loan options, or simply trying to better understand the mortgage process, this glossary is designed to help.

And if you still have questions, our team is always here to help walk you through it personally.

1. Equity

Home equity is the value of a homeowner’s interest in their home. In other words, it is the real property’s current market value (less any liens that are attached to that property). The amount of equity in a house—or its value—fluctuates over time as more payments are made on the mortgage and market forces impact the current value of the property.

2. Principal

The principal is the amount which a borrower owes on a loan and must pay back to the lender.

3. Mortgage Interest

Mortgage interest is the percentage charged on a mortgage that must be paid in addition to the principal. The mortgage interest rate is related to prevailing interest rate levels and may be fixed or adjustable.

4. Escrow Account

Escrow is a legal arrangement in which a third party temporarily holds large sums money or property until a particular condition has been met (e.g., the fulfillment of a purchase agreement).

5. Down Payment

A down payment is a type of payment, often in cash, made in the early stages of a purchase of an expensive product. The payment represents a percentage of the full purchase price.

6. Pre-Approval

A mortgage pre-approval is a letter from a lender stating how much money you may qualify to borrow for a home purchase. During the pre-approval process, a lender reviews factors like your income, credit score, debts, and assets to determine your estimated loan amount. Getting pre-approved can help you understand your budget and show sellers you’re a serious buyer.

7. Appraisal

An appraisal is a valuation of property, such as real estate, a business, collectible, or an antique, by the estimate of an authorized person. The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser.

8. Good Faith Estimate

The term good faith estimate (GFE) refers to a document that outlines the estimated costs and terms of a mortgage loan offer. GFEs provide consumers with basic information about the offer including a breakdown of costs.

9. Rate Lock

A quoted mortgage rate means basically nothing until it’s actually locked by the lender on your behalf. Once it’s locked in, the rate won’t be subject to changes even if mortgage rates rise and fall as your loan application is processed and eventually funded.

Just be sure to close on time to avoid having to pay a lock extension fee!

10. Adjustable Rate Mortgage (ARM)

A variable-rate mortgage, adjustable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate.

11. Underwriting

Mortgage underwriting is the process a lender uses to determine if the risk of offering a mortgage loan to a particular borrower is acceptable and is a part of the larger mortgage origination process.

12. Earnest Money

Earnest money is a deposit made to a seller that represents a buyer's good faith to buy a home. The money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing.

13. Closing Costs

Expenses over and above the cost of the property, which can include items such as title insurance, appraisal, processing, underwriting, and surveying fees.

14. Deed

The legal document that transfers property from one owner to another.

15. Amortization

The gradual reduction of debt over the term of the loan. Amortization occurs through repayment of principal.

Still have questions about mortgage terminology? Our loan officers are happy to walk you through the process and explain your options in plain English. Contact us today!