Buying or refinancing a home can involve unfamiliar terminology. This glossary explains common mortgage and home financing terms in straightforward language to help you better understand the loan process.

Mortgage programs, guidelines, and terminology can vary by lender and loan type. Contact AZ Financial if you have questions about how a particular term may apply to your situation.

Acceleration Clause
A provision in a mortgage or deed of trust that may allow the lender to require repayment of the outstanding loan balance if certain terms of the loan agreement are violated, subject to the loan documents and applicable law.

Adjusted Basis
Generally, the original cost of a property adjusted for certain improvements, depreciation, and other applicable items. Adjusted basis may be used for tax purposes. Consult a qualified tax professional regarding your individual circumstances.

Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that may change after an initial period according to the terms of the loan. Adjustments are generally based on an index plus a margin and are subject to applicable rate caps.

Adjustment Date
The date on which the interest rate may change on an adjustable-rate mortgage.

Adjustment Period
The period of time between potential interest-rate adjustments on an adjustable-rate mortgage.

Amortization
The process of repaying a loan through scheduled payments of principal and interest over a specified period.

Amortization Term
The period over which a loan is scheduled to be fully repaid. For example, a 30-year mortgage generally has a 360-month amortization term.

Annual Percentage Rate (APR)
A standardized measure of the cost of credit expressed as an annual rate. APR incorporates the interest rate and certain other finance charges, making it useful when comparing mortgage offers. APR is not the same as the loan's note interest rate.

Appraisal
An independent professional opinion of a property's value prepared by a licensed or certified appraiser. An appraisal may be required depending on the loan program and transaction.

Appraised Value
The value assigned to a property by an appraiser based on an analysis of the property, relevant market information, and other applicable factors.

Asset
Something of financial value owned by a borrower, such as funds in checking or savings accounts, investments, or real estate.

Assumable Mortgage
A mortgage that may permit a qualified buyer to take over the existing borrower's loan, subject to the loan terms, lender or servicer requirements, and applicable approval.

Balloon Mortgage
A mortgage that may require a substantial remaining balance to be paid in a lump sum at the end of a specified period.

Balloon Payment
A large final payment that may be due at the end of certain types of loans.

Bridge Loan
Short-term financing that may help a borrower purchase another property before completing the sale of an existing property. Availability and requirements vary by lender.

Buydown
An arrangement in which funds are used to reduce a borrower's mortgage payments for a specified period or to obtain a lower note interest rate, depending on the type of buydown. Buydowns may be temporary or permanent, depending on the loan structure. 

2/1 Temporary Buydown
A financing arrangement that temporarily reduces the borrower's mortgage payments during the first two years of the loan. Payments are typically calculated as if the interest rate were 2 percentage points below the note rate during the first year and 1 percentage point below the note rate during the second year. Beginning in the third year, payments are based on the full note rate for the remaining loan term. Eligibility and qualification requirements vary by loan program and lender. 

Cap / Interest Rate Cap
A limit on how much the interest rate on an adjustable-rate mortgage may increase or decrease at a particular adjustment or over the life of the loan, depending on the loan terms.

Certificate of Eligibility (COE)
A document used in connection with VA home loans that provides information regarding a veteran's, service member's, or other eligible applicant's VA home-loan entitlement. Final eligibility is determined under VA requirements.

Closing
The final stage of a real estate transaction when required documents are signed and the conditions necessary to complete the transaction are satisfied. The timing of signing, funding, recording, and transfer of ownership may vary.

Closing Costs
Costs associated with obtaining a mortgage and completing a real estate transaction. Depending on the transaction, these may include lender fees, appraisal charges, title and settlement fees, prepaid interest, taxes, insurance, and other applicable costs.

Closing Disclosure (CD)
A standardized disclosure that provides final information about many of the terms and costs associated with a mortgage transaction. For applicable transactions, borrowers generally receive the Closing Disclosure at least three business days before consummation, subject to federal requirements and exceptions.

Conventional Loan
A mortgage that is not insured or guaranteed by a federal government agency. Conventional loans may be conforming or non-conforming and have eligibility requirements established by the lender and applicable investors.

Credit Report
A record of a consumer's reported credit history, including information about credit accounts, payment history, balances, and other credit-related information. Mortgage lenders use credit reports to evaluate a loan application.

Credit Score / FICO® Score
A numerical representation of information contained in a consumer's credit report that may be used by lenders when evaluating credit risk. Mortgage lenders may use particular scoring models and may obtain scores from multiple credit reporting agencies. Credit-score requirements vary by loan program and lender.

DD214 (Certificate of Release or Discharge from Active Duty) 

A military service document issued upon a service member's separation or discharge from active duty. A DD214 may document qualifying military service when establishing eligibility for a VA home loan. Depending on the circumstances, you may need additional service documentation.

Debt Service Coverage Ratio (DSCR)

A ratio used in certain real estate investment loan programs to compare a property's qualifying rental income with its applicable debt obligations. DSCR loan programs may allow an investment property's cash flow to be considered when evaluating qualification rather than relying primarily on the borrower's personal income. Calculation methods, documentation, property eligibility, and other requirements vary by lender and loan program.    

Debt-to-Income Ratio (DTI)
A comparison of a borrower's qualifying monthly debt obligations to qualifying gross monthly income, expressed as a percentage. DTI is one factor lenders may consider when evaluating mortgage eligibility.

Deed of Trust
A legal instrument commonly used in Arizona to secure a real-estate loan. It generally involves the borrower, lender or beneficiary, and a trustee.

Default
Failure to satisfy one or more obligations contained in a loan agreement, such as making required payments or complying with other loan terms.

Delinquency
A situation in which a required loan payment has not been made by its due date.

Discount Points
Fees paid in connection with a mortgage that may be associated with obtaining a particular interest rate. One point equals 1% of the loan amount. The cost and effect of points vary by loan and market conditions.

Down Payment
The portion of a property's purchase price that is paid by the buyer rather than financed through the mortgage.

Earnest Money Deposit
Money a buyer provides in connection with a purchase contract to demonstrate an intention to complete the transaction. How the deposit is applied or refunded depends on the purchase agreement and applicable circumstances.

Equity
The difference between a property's current value and the total amount owed against the property.

Escrow
An arrangement in which money, documents, or other items are held by a neutral third party until specified conditions of a transaction are satisfied.

Escrow Account / Impound Account
An account that may be established by a mortgage servicer to collect portions of certain property-related expenses, such as property taxes and homeowners insurance, as part of the borrower's monthly mortgage payment. The servicer then pays applicable expenses when due.

Fannie Mae
The Federal National Mortgage Association, commonly known as Fannie Mae, is a government-sponsored enterprise that purchases qualifying mortgages from approved lenders and helps provide liquidity to the U.S. housing finance market.

FHA Loan
A mortgage insured by the Federal Housing Administration. Approved lenders originate FHA loans, which are subject to FHA and lender eligibility requirements.

Learn more about FHA home loans 

Fixed-Rate Mortgage
A mortgage in which the note interest rate remains fixed for the term of the loan. Although the principal-and-interest payment generally remains consistent, the total monthly housing payment may change due to items such as property taxes, insurance, or mortgage insurance.

Freddie Mac
The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, is a government-sponsored enterprise that purchases qualifying mortgages and supports liquidity in the U.S. housing finance market.

Ginnie Mae (GNMA)
The Government National Mortgage Association, commonly known as Ginnie Mae, is a government corporation within the U.S. Department of Housing and Urban Development that guarantees securities backed by certain government-insured or government-guaranteed mortgages.

Home Equity
The difference between the value of a property and the total amount of debt secured by that property.

Home Equity Line of Credit (HELOC)
A revolving line of credit secured by available equity in real property. A HELOC generally allows the borrower to draw funds up to an approved credit limit during a specified draw period, subject to the loan terms.

Homeowners Insurance
Insurance that generally provides coverage for certain losses involving a home and personal property and may provide liability protection. Mortgage lenders typically require adequate property insurance while a loan is secured by the property.

Housing Expense Ratio
A comparison of certain monthly housing expenses to qualifying gross monthly income. The calculation and expenses included may vary by loan program.

Hybrid Adjustable-Rate Mortgage (Hybrid ARM)
An adjustable-rate mortgage with an initial fixed-rate period followed by periodic rate adjustments. The loan terms establish the specific fixed period, adjustment frequency, index, margin, and rate caps.

Index
A published benchmark used with a margin to determine interest-rate adjustments on certain adjustable-rate mortgages.

Interest
The cost charged for borrowing money, generally expressed as a percentage of the outstanding loan balance.

Interest Rate
The percentage charged for borrowing the principal amount of a loan. The interest rate is used to calculate interest owed and is different from the Annual Percentage Rate (APR).

Interest Rate Floor
The minimum interest rate permitted under the terms of certain adjustable-rate mortgages.

Jumbo Loan
A mortgage that exceeds applicable conforming loan limits or otherwise does not meet requirements for purchase by Fannie Mae or Freddie Mac. Qualification requirements vary by lender and program.

Liabilities
Financial obligations or debts owed by a borrower, such as credit cards, auto loans, student loans, installment loans, and other obligations.

Line of Credit
A credit arrangement that permits a borrower to access funds up to an approved credit limit, subject to the terms of the account.

Liquid Asset
An asset that is cash or can generally be converted to cash relatively quickly, such as funds in certain bank or investment accounts.

Loan Estimate (LE)
A standardized three-page disclosure that provides important information about a proposed mortgage, including the estimated interest rate, monthly payment, closing costs, and other loan terms. For most covered mortgage transactions, the lender generally must provide a Loan Estimate within three business days after receiving the information necessary to constitute an application.

Loan Term
The length of time established for repayment of a loan.

Loan-to-Value Ratio (LTV)
A percentage comparing the amount of a mortgage to the property's applicable value. The value used in the calculation may depend on the transaction and loan-program requirements.

Margin
A percentage added to an applicable index to help determine the interest rate on an adjustable-rate mortgage after an adjustment.

Maturity Date
The date on which the remaining balance of a loan is scheduled to become due under the loan terms.

Mortgage
A loan secured by real property. The term may also refer to the legal instrument that creates the lender's security interest, depending on the jurisdiction.

Mortgage Broker
A licensed mortgage professional or company that works with wholesale lenders to help borrowers evaluate available mortgage programs and financing options. A mortgage broker assists with loan origination and works with the selected lender throughout the mortgage process.

Learn why borrowers work with AZ Financial 

Mortgage Insurance
Insurance that protects the lender or other covered party against certain losses if a borrower defaults. Requirements and types of mortgage insurance vary depending on the loan program.

Mortgage Insurance Premium (MIP)
A mortgage-insurance charge associated with FHA-insured mortgages. The amount and duration depend on applicable FHA requirements and the specific loan.

Negative Amortization
A situation in which scheduled loan payments are insufficient to cover all interest due, causing unpaid interest to be added to the loan balance. As a result, the principal balance may increase.

Non-QM Mortgage
A mortgage that does not meet the requirements for a Qualified Mortgage under applicable federal rules. Non-QM programs may provide alternative methods of documenting or evaluating a borrower's ability to repay, subject to program and lender requirements.

Note / Promissory Note
A legal document containing the borrower's promise to repay a loan according to specified terms, including the amount borrowed, interest rate, payment requirements, and other applicable provisions.

Origination Fee
A fee that may be charged in connection with originating and processing a mortgage loan. The amount and structure of origination charges vary by transaction.

Owner Financing
A transaction in which the property seller provides some or all of the financing directly to the buyer rather than the buyer obtaining all financing from a traditional mortgage lender.

PITI — Principal, Interest, Taxes and Insurance
An abbreviation commonly used to describe major components of a monthly housing payment: principal, interest, property taxes, and homeowners insurance. Depending on the loan, mortgage insurance, homeowners association dues, and other expenses may also need to be considered.

Points
A mortgage pricing term in which one point equals 1% of the loan amount. Points may represent different types of charges, so borrowers should review their Loan Estimate and other disclosures to understand what a particular point represents.

Pre-Approval
A preliminary evaluation of a borrower's mortgage qualifications based on financial information and, depending on the process, supporting documentation and credit information. A pre-approval is not a commitment to lend and remains subject to underwriting, acceptable property, and other applicable conditions.

Pre-Qualification
A preliminary estimate of potential mortgage eligibility based on information provided by the borrower. A pre-qualification may involve less documentation or verification than a pre-approval and is not a commitment to lend.

Prepayment Penalty
A charge that may apply under the terms of certain loans when some or all of the loan is paid off before a specified time. Many residential mortgages do not have prepayment penalties; borrowers should review their loan documents for the terms applicable to their loan.

Principal
The amount borrowed, excluding interest and other charges. A portion of a mortgage payment may be applied toward reducing the outstanding principal balance.

Principal Balance
The amount of loan principal that remains unpaid at a particular point in time.

Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurer that protects the lender against certain losses if a borrower defaults. PMI may be required on certain conventional loans depending on factors such as loan-to-value ratio and loan program.

Qualifying Ratios
Calculations used as part of evaluating a borrower's ability to qualify for financing. These may compare housing expenses and total qualifying monthly debt obligations to qualifying income.

Rate Lock
An agreement that, subject to its terms and conditions, establishes a mortgage interest rate and certain pricing for a specified period. A rate lock may be subject to expiration dates, property information, loan terms, and other conditions.

Real Estate Settlement Procedures Act (RESPA)
A federal consumer-protection law governing certain aspects of residential real estate settlement and mortgage servicing practices, including required disclosures and restrictions on certain referral arrangements.

Refinance
The process of replacing an existing mortgage or other qualifying debt secured by real property with a new loan. Refinancing involves costs and should be evaluated based on the borrower's objectives and circumstances.

Revolving Debt
Debt associated with a revolving credit account, such as a credit card or line of credit, that generally permits repeated borrowing up to an approved credit limit.

Secondary Mortgage Market
The market in which existing mortgage loans and mortgage-backed securities are bought and sold. The secondary market helps provide liquidity to mortgage lenders.

Seller Concessions / Seller Credits
Amounts a seller agrees to contribute toward certain buyer costs in a real estate transaction, subject to the purchase agreement and applicable loan-program limits.

Servicer / Mortgage Servicer
The company responsible for administering a mortgage after closing. Servicing may include collecting payments, managing escrow accounts, providing account statements, and handling other loan-related functions. The servicer may or may not be the company that originally made the loan.

Title
The legal concept of ownership rights in real property. A title search is generally performed during a real estate transaction to identify recorded ownership interests, liens, and certain other matters affecting the property.

Title Insurance
Insurance designed to protect against certain covered title defects or claims involving ownership of real property. Lender's title insurance generally protects the lender; owner's title insurance generally protects the property owner, subject to the terms of the policy.

Treasury Index
A benchmark based on U.S. Treasury securities that may be used in connection with the pricing or adjustment of certain mortgage products.

Underwriting
The process of evaluating a mortgage application to determine whether it meets applicable lender and loan-program requirements. Underwriting may include review of credit, income, employment, assets, debts, property information, and other applicable factors.

USDA Loan
A mortgage program associated with the U.S. Department of Agriculture that may provide financing for eligible borrowers and properties in qualifying areas. Eligibility, income limits, property requirements, and other conditions apply.

VA Loan
A mortgage made by an approved lender and guaranteed in part by the U.S. Department of Veterans Affairs. VA loans are available to eligible veterans, service members, and certain other qualified applicants, subject to VA and lender requirements.

Explore VA loan benefits 

Understanding mortgage terminology is an important part of making an informed financing decision. AZ Financial can help you compare available mortgage programs, understand estimated payments and costs, and determine which financing options may fit your individual situation.

Buying, refinancing, or simply have a mortgage question? Contact AZ Financial or apply securely online to get started.

This glossary is provided for general educational purposes only. Definitions have been simplified for consumer understanding and may not describe every requirement, exception, or circumstance. Mortgage programs, guidelines, rates, costs, and eligibility requirements vary by lender, loan program, property, and borrower qualifications and are subject to change. This information is not a commitment to lend or legal, tax, or financial advice.