Mortgage Glossary
Understand the key terms to master your mortgage.
Amortization
Amortization is repaying a loan through regular payments over time; each payment covers interest and gradually reduces the principal still owed.
Principal
Principal is the original amount of money borrowed, not counting interest or fees. Each payment on a loan reduces the principal still owed to the lender.
Interest
Interest is the cost of borrowing money, usually a yearly percentage of the principal. Lenders charge it on the outstanding balance of the loan.
APR (Annual Percentage Rate)
APR is a loan's yearly cost as a percentage. It combines the interest rate with mandatory fees, so offers from different lenders are easier to compare.
Euribor
The Euro Interbank Offered Rate. A daily reference rate that reflects the average interest rate at which eurozone banks lend to each other.
Refinancing
Refinancing means replacing an existing loan with a new one, usually to get a lower rate, a different term or better conditions, often with extra fees.
Foreclosure
Foreclosure is the legal process in which a lender takes control of and sells a property after the borrower fails to make mortgage payments as agreed.
Subprime
Subprime loans are offered to borrowers with low credit scores or limited credit history. Default risk is higher, so lenders charge higher interest.
Fixed Rate
A fixed rate stays the same for the whole loan term or a set period, so the monthly payment is predictable even if market interest rates rise or fall.
Variable Rate
A variable rate can change over time because it follows an index such as Euribor plus a margin, so your monthly payment may rise or fall during the loan.
Down Payment
A down payment is the upfront amount you pay from your own funds when buying a home, usually a percentage of the price; a mortgage finances the rest.
Loan-to-Value (LTV)
Loan-to-value (LTV) compares the loan with the property's appraised value as a percentage; a lower LTV means less lender risk and often a better rate.
Debt-to-Income Ratio (DTI)
Debt-to-income ratio (DTI) is the share of your gross monthly income that goes to debt payments. Lenders use it to judge how much mortgage you can afford.
Closing Costs
Closing costs are the fees and taxes due when a home purchase is completed: transfer taxes, notary or legal fees, registration and lender charges.
Equity
Equity is the difference between your home's market value and the mortgage balance you owe. It grows as you repay the loan or as the home gains value.
Escrow
A financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction.
Pre-approval
Pre-approval is a lender's conditional commitment to lend a specific amount, based on your income and credit, which shows sellers you are a serious buyer.
Underwriting
Underwriting is how a lender checks your income, credit history and the property to decide whether the risk of lending to you is acceptable.
Appraisal
An appraisal is an independent professional estimate of a property's market value. Lenders use it to confirm the home is worth enough to secure the loan.
Private Mortgage Insurance (PMI)
PMI (private mortgage insurance) protects the lender, not you, if you stop paying. In the US it is usually required when the down payment is under 20%.
Lien
A lien is a legal claim on a property that secures a debt. Until the debt is paid, the property usually cannot be sold or refinanced freely.
Deed
A deed is the legal document that transfers ownership of a property from seller to buyer. It is signed by the parties and usually publicly recorded.
Maturity Date
The maturity date is the day the final payment on a loan is due, when the debt must be fully repaid and the loan ends, according to the repayment schedule.
Default
Default is the failure to repay a loan under the agreed terms. It can lead to penalties, a damaged credit record and the loss of the collateral.
Collateral
Collateral is an asset, often the property itself, that a borrower pledges to secure a loan. If the borrower defaults, the lender can claim it.
Break-even Point
The specific year in the analysis where the cost of buying a home becomes financially superior to renting, factoring in equity growth and appreciation.
French Amortization System
The most common mortgage system globally where the monthly payment remains constant throughout the life of the loan. Initially, the payment covers mostly interest, and over time, it shifts to covering mostly the principal balance.