Mortgage terms, in plain English.

Every word you will hear between your first call and the closing table, defined in a sentence or two. Search it, or jump by letter.

A

Adjustable Rate Mortgage (ARM)

A mortgage whose interest rate adjusts periodically based on changes in a specified index, such as the one-year Treasury bill or SOFR. The rate is usually fixed for the first few years, then moves with the index.

Amortization

The schedule of installment payments that pays off a loan, interest and principal together, by the end of a fixed period of time. Early payments are mostly interest; later ones are mostly principal.

Annual Percentage Rate (APR)

The total cost of a mortgage stated as a yearly rate. It is typically higher than the note rate because it includes the base interest rate plus specific closing costs.

Appraisal

A professional report that estimates the market value of a property. The lender orders it, and the loan amount is based on the lower of the appraised value and the purchase price.

Assessed Value

The value a tax authority places on real property for the purpose of assessing yearly property taxes. It is often different from market value.

B

Balloon Mortgage

A mortgage that is amortized over a stated period but comes due in full earlier, for example a 30-year-due-in-15: the payments are based on a 30-year repayment, but the remaining balance is due in 15 years.

BRRRR

Buy, Rehab, Rent, Refinance, Repeat. An investing strategy where you buy a distressed property, renovate it, place a tenant, refinance into long-term financing (often a DSCR loan) at the new value, and use the cash-out to buy the next one.

DSCR vs. hard money

C

Cap Limits

How much the interest rate on an adjustable rate mortgage can increase or decrease, both at each adjustment and over the life of the loan.

Cap Rate (Capitalization Rate)

A property’s net operating income divided by its value. A 7% cap rate means the property earns 7% of its price a year before debt. Higher cap rates mean higher returns and usually more risk.

Cash Flow

What is left each month after every property expense and the mortgage payment are paid. Positive cash flow means the rental earns more than it costs to own and run.

Cash to Close

The total you bring to the closing table: the down payment plus closing costs, minus any deposits already paid and any seller or lender credits.

Cash-on-Cash Return

Annual cash flow divided by the cash you put into the deal (down payment, closing costs, rehab). A 10% cash-on-cash return means a $100,000 investment pays back $10,000 a year.

Cash-Out Refinance

A new loan larger than the one it replaces; you receive the difference in cash. The “refinance” step of BRRRR, used to pull equity out of a renovated rental.

Cash-Out Refinance

Closing Costs

The fees paid to complete the loan and transfer the property: lender fees, appraisal, title insurance, recording fees, prepaid taxes and insurance. Typically 2 to 5 percent of the purchase price.

Closing cost calculator

Closing Disclosure

The five-page federal form with the final loan terms and closing costs. You receive it at least three business days before closing so you can compare it with your Loan Estimate.

Collateral

Property pledged as security for a loan. For a mortgage, the collateral is the home itself.

Conventional Mortgage

A mortgage not insured or guaranteed by a government program such as FHA, VA or USDA. Conforming conventional loans follow Fannie Mae and Freddie Mac guidelines.

Conventional loans

D

Debt Service

The total principal and interest paid on a loan over a period, usually a month or a year. It is the denominator of the debt service coverage ratio.

Debt-to-Income Ratio (DTI)

Your total monthly debt payments, including the new mortgage, divided by your gross monthly income. Lenders use it to decide how much you can borrow.

Affordability calculator

Deed

The legal document, recorded in the county, that conveys title to a property from the seller to the buyer.

Deed of Trust

In some states, the legal document that pledges the property as security for a mortgage loan. It serves the same purpose as a mortgage.

Default

Failure to make mortgage payments on time or to comply with other requirements in the note.

Down Payment

The part of the purchase price you pay up front rather than finance. As little as 3 percent on some conventional loans, 3.5 percent on FHA, and zero on VA and USDA loans.

Down payment assistance

DSCR (Debt Service Coverage Ratio)

A rental property’s monthly rent divided by its full monthly payment (principal, interest, taxes, insurance and association dues). A 1.0 means the rent exactly covers the payment; 1.25 means 25% more income than needed. DSCR loans qualify on this ratio instead of on your personal income.

DSCR Loans in New Jersey

E

Earnest Money

The deposit a buyer puts down when an offer is accepted, held in escrow and credited toward the purchase at closing. It shows the seller you are serious.

Easement

A right of way that lets someone other than the owner cross or use part of a property, such as a utility company reaching its lines.

Equity

The portion of a property’s value over and above the amount owed against it. It grows as you pay down the loan and as the home appreciates.

Escrow

A neutral third party that holds documents and funds on behalf of the buyer and seller until closing. Also the account your servicer uses to pay your property taxes and insurance from your monthly payment.

F

FHA Loan

A mortgage insured by the Federal Housing Administration. Lower down payment and credit requirements than conventional loans, with a mortgage insurance premium paid by the borrower.

FHA loans

First Mortgage

The mortgage that has priority over any other liens recorded against the property. If the home is sold, it is paid first.

Fixed Rate Mortgage

A mortgage whose interest rate does not change for the life of the loan, so the principal-and-interest payment stays the same every month.

Foreclosure

The legal process by which a lender takes and sells a property after the borrower defaults, using the proceeds to pay off the loan.

G

Gift Letter

A signed letter from the person giving you money toward the purchase, stating that the funds are a gift and there is no obligation to repay them.

Gross Monthly Income

Total monthly income before taxes and other deductions. Qualifying ratios are calculated against this number, not take-home pay.

Gross Rent Multiplier (GRM)

Purchase price divided by annual gross rent. A GRM of 10 means the property costs ten times its yearly rent. Lower is better for cash flow.

H

Hard Money Loan

A short-term, high-interest loan secured by the property, used to buy and renovate quickly. Usually refinanced into a DSCR loan once the property is rent-ready and leased.

DSCR vs. hard money

Hazard Insurance

Also called homeowners insurance: coverage for physical damage to the property from fire, wind, vandalism and other hazards. Lenders require it.

Home Equity Line of Credit (HELOC)

A revolving line of credit secured by your home, usually a second mortgage, that lets you draw funds as needed up to a set limit and pay interest only on what you use.

I

Index

A published rate, such as SOFR or the yield on the one-year Treasury bill, used to set the interest rate on an adjustable rate mortgage when it adjusts.

Interest-Only Loan

A loan whose payments cover only interest, not principal, for a set period. Some DSCR programs offer an interest-only option to maximize cash flow in the early years.

J

Jumbo Loan

A loan larger than the conforming limit that Fannie Mae and Freddie Mac can buy, which the FHFA resets each year and varies by county. Also called a non-conforming loan.

Specialty loans

L

Legal Description

The formal description of a property’s location and boundaries as recorded at the county, used in the deed and mortgage instead of the street address.

Lien

A legal claim against a property as security for a debt. A mortgage is a lien; so are unpaid tax bills and contractor claims.

Loan Estimate

The three-page federal form a lender must give you within three business days of your application, showing the estimated rate, payment and closing costs so you can compare offers.

Loan-to-Value Ratio (LTV)

The loan amount divided by the lower of the sales price or appraised value. A 20 percent down payment means an 80 percent LTV.

M

Market Rent

What a property could reasonably rent for based on comparable rentals nearby. On a DSCR loan the appraiser’s market-rent analysis is what the lender uses when there is no lease in place.

Monthly Payment

Usually principal, interest, taxes and insurance, together called PITI, paid each month on a mortgage loan. Mortgage insurance and HOA dues are added when they apply.

Payment calculator

Mortgage

The legal instrument that pledges real property as security for the repayment of a loan. In everyday use, the home loan itself.

N

Net Operating Income (NOI)

Gross rental income minus operating expenses (taxes, insurance, maintenance, management), before the mortgage. The numerator in cap-rate math.

Non-QM Loan

A mortgage that does not meet the federal “qualified mortgage” standard, which lets the lender qualify you another way: bank statements, assets or rental income instead of tax returns. DSCR loans are Non-QM.

Non-QM Loans

O

Origination Fee

A fee paid to the lender for processing a loan application, stated in points. One point equals one percent of the loan amount.

P

PITI Reserves

Cash a borrower must still have after the down payment and closing costs, measured in months of the full housing payment. Some programs require two or more months in reserve.

PITIA

Principal, Interest, Taxes, Insurance and Association dues: the complete monthly payment on a property. This is the number the rent has to cover in a DSCR calculation.

Points

Prepaid interest paid at closing to lower the rate. One point equals one percent of the loan amount. Whether points pay off depends on how long you keep the loan.

Pre-Approval

A lender’s written statement, after reviewing your credit, income and assets, of how much you can borrow. It carries far more weight with sellers than a pre-qualification.

Get pre-qualified

Prepayment Penalty

A fee for paying a loan off early. Many DSCR loans carry one for the first three to five years, usually a declining percentage of the balance; no-prepay options cost a little more in rate.

Private Mortgage Insurance (PMI)

Insurance written by a private company that protects the lender if the borrower defaults. Required on most conventional loans with less than 20 percent down, and cancellable once you reach 20 percent equity.

Purchase Contract

The written agreement between buyer and seller that sets the price, closing date, deposits, inspections and any conditions that must be met before the sale closes. Also called the sales contract or earnest money agreement.

Q

Qualifying Ratios

The two calculations lenders use to decide whether you qualify: housing expense divided by gross income (the front-end ratio), and total monthly debt divided by gross income (the back-end ratio).

R

Rate Lock

A lender’s commitment to hold a specific interest rate for a specific period, typically 30 to 60 days, while your loan is processed.

Refinance

Replacing your current mortgage with a new one, to lower the rate, shorten the term, switch from adjustable to fixed, or take cash out of your equity.

Refinance options

Rent-to-Price Ratio

Monthly rent divided by purchase price. The “1% rule” says a $300,000 property should rent for about $3,000 a month; in New Jersey 0.7% and up is considered strong.

Reverse Mortgage

A loan for homeowners 62 and older that converts home equity into cash, with no monthly mortgage payment. The loan is repaid when the home is sold or the last borrower leaves it.

Reverse mortgages

S

Seasoning

How long you have owned a property or held a loan. Many DSCR programs want three to six months of ownership before a cash-out refinance at the new appraised value.

Short-Term Rental (STR)

A property rented by the night or week, typically through Airbnb or VRBO. Some DSCR programs count STR income from a booking history or a market projection, often with a conservative haircut.

Stabilized Property

A rental that is renovated, occupied and producing steady rent. DSCR loans generally require the property to be stabilized or clearly rent-ready at closing.

T

Title Insurance

Insurance, issued after the public records are searched, that protects against liens or other claims against the property that the search did not find. The lender’s policy is required; an owner’s policy protects you.

Truth in Lending Act

The federal law that requires lenders to fully disclose the terms and cost of a mortgage, including the APR and other charges, in a standard form.

U

Underwriting

The lender’s review of a loan application, your credit, income, assets and the property, to decide whether to approve the loan and on what terms.

USDA Loan

A zero-down mortgage guaranteed by the U.S. Department of Agriculture for homes in eligible rural and suburban areas, with income limits.

USDA loans

Terms, explained at length

Browse the Knowledge Base

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