Amortization is the process of paying installments toward a loan over a set time, such as a mortgage. Each installment pays off a portion of the principle while the remainder goes toward interest. A standard home loan may amortize over a 15, 20, or 30-year term. When a loan fully amortizes, it has been paid off in full by the end of the amortization schedule.

An annual percentage rate (APR) is the cost of borrowing money for a mortgage. The APR is a broader measure than the interest rate alone because it includes the interest rate, discount points, and other fees associated with the loan. An APR provides a more accurate image of the loan's true cost.

An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes based on market rates. Borrowers initially receive a fixed interest period when signing up for an ARM. This is the loan's introductory period, which can last up to ten years. During the initial period, your interest rate is typically lower than that of a fixed-rate loan. After the introductory period, the interest rate is determined by market interest rates.

Mortgage lenders require an appraisal before signing a home loan agreement, which is a rough estimate of the value of your home. The appraisal ensures that the lender is lending you only what your home is worth. Your lender can assist you by scheduling an appraisal by an independent third party.

An asset is anything you own with a cash value in the context of a mortgage. A lender will want to verify assets when someone is looking to take out a mortgage loan. This ensures that you have enough money saved and invested to cover your mortgage if a financial emergency occurs.

Balloon loans, or a balloon mortgage, require a lump sum payment at some point during the mortgage term, usually at the end. With a balloon loan, you can pay either an interest-only mortgage or one including both principal and interest payments. Interest-only mortgages require you to pay only the interest cost during the term, with the entire balance due at the end.

Closing costs are the upfront, out-of-pocket expenses associated with obtaining a mortgage. They cover various costs incurred at the time of loan signing or closing. Closing costs often include but are not limited to an origination, appraisal, credit report, and title search fee. Homebuyers typically pay closing costs, but in some cases, sellers may cover some of the costs.

A Closing Disclosure is a document that details the final loan terms. This document contains your interest rate, loan principal, and closing costs. Before signing the dotted line, by law, lenders must give borrowers at least three days to review the closing disclosure.

The debt-to-income (DTI) ratio measures a borrower's ability to repay a mortgage which is calculated by totaling all monthly debt payments and dividing the total by the gross monthly income. Many lenders prefer borrowers to have a DTI ratio of no more than 43%, but this figure is somewhat flexible.

A deed is a physical document proving you own your home. When your loan is closed, you will receive your deed.

Discount points are a type of closing cost that you can pay to "buy" a lower interest rate. One discount point equals one percent of your loan amount. The more discount points you purchase, the lower your interest rate. Borrowers must pay for them in cash at closing if buying more points.

A down payment is an upfront payment of the home's purchase price paid by the buyer. Buyers often put down a percentage of the home's value as a down payment and then borrow the remainder through a mortgage. A larger down payment increases borrowers' chances of obtaining a lower interest rate.

Earnest money is a deposit paid by the homebuyer when entering into a purchase agreement for a house, usually as a sign of good faith. The deposit is generally held in an escrow account by the title company. Earnest money gets applied to the down payment or closing costs when the home is sold. If the sale fails, the earnest money is given either to the buyer or seller, depending on whether the reason for the termination was allowed in the purchase agreement.

An escrow account, also called an impound account, holds a portion of the borrower's monthly mortgage payment to cover homeowners insurance premiums and property taxes. The mortgage lender will usually set up an escrow account for insurance and taxes and make payments on the borrower's behalf. This system ensures these bills are paid and allows the borrower to make small monthly installments rather than large payments once or twice a year.

If the homeowner has a fixed-rate mortgage, the interest rate stays will not change over the life of the loan. Homeowners who choose a fixed-rate term frequently believe that interest rates will rise over the duration of their loan and value the stability and predictability that this type of loan provides.

A loan estimate is a standard document containing mortgage details. It is provided to borrowers when they apply for a loan. The loan estimate includes the interest rate, monthly payment, total closing costs estimates, taxes, insurance, prepayment penalties, and other important loan information. The loan estimate can help compare terms when shopping for a mortgage; receiving one does not imply that they have been approved or denied the loan.

Mortgage lenders use the loan-to-value ratio, or LTV ratio, to compare the loan amount to the property value. An LTV ratio of 80% or less, which corresponds to a 20% down payment, is ideal. FHA or VA loans often allow for higher LTV ratios and may or may not require mortgage insurance.

A mortgage term is how long the borrower will pay toward the loan before fully owning the home. For example, if a borrower has a 30-year term, they will make monthly payments on the loan for 30 years before it matures.

A pre-approval is a document that indicates how much someone can afford to borrow for a home loan. Many lenders regard pre-approval as the first step in obtaining a mortgage. When applying for pre-approval, the lender will ask about credit score, income, assets, and other financial information. The lender uses the information to determine the amount the borrower qualifies for in a home loan. This can provide you with a rough budget to use when comparing properties.

The amount borrowed is referred to as the principal balance. For example, if you buy a house with a $450,000 loan from your lender, your principal balance is $450,000 and does not include interest.