9 Mortgage Terms Every First-Time Buyer Should Know

Mortgage paperwork is full of terms that get thrown around like everyone already knows them. Here are the 9 you’ll actually run into, explained in plain language.

1. Principal

The amount you actually borrowed, before any interest is added. If you buy a $350,000 home with a $70,000 down payment, your principal is $280,000.

2. Interest rate vs APR

Your interest rate is used to calculate your monthly payment. Your APR (Annual Percentage Rate) includes the interest rate plus most lender fees, spread over the loan term, which is why it’s usually higher and is the better number for comparing offers.

3. PMI (Private Mortgage Insurance)

An extra monthly cost added if your down payment is below 20%, protecting the lender if you default. It typically drops off once you reach 20% equity.

4. Escrow

An account your lender uses to collect your property tax and insurance in monthly installments, then pays those bills on your behalf when due.

5. Amortization

The schedule showing how each payment splits between principal and interest over the life of the loan. Early payments are mostly interest; later payments are mostly principal.

6. Fixed-rate vs adjustable-rate

A fixed-rate mortgage keeps the same interest rate for the entire term. An adjustable-rate mortgage (ARM) starts with a lower rate that can change after an initial period, based on market conditions.

7. Closing costs

Fees due at the time of purchase, separate from your down payment, typically 2-5% of the loan amount, covering things like appraisal, title insurance, and origination fees.

8. Loan-to-value ratio (LTV)

Your loan amount divided by the home’s appraised value. A $280,000 loan on a $350,000 home is an 80% LTV, a key number lenders use to set your rate and PMI requirement.

9. Pre-approval vs pre-qualification

Pre-qualification is a quick, informal estimate based on self-reported numbers. Pre-approval involves an actual credit check and documentation, and carries far more weight with sellers.

Once you know your numbers, plug them into our mortgage calculator to see your actual monthly payment, read our breakdown of how much house you can really afford, or compare terms with our 15-year vs 30-year mortgage guide.

What’s the most important mortgage term to understand before house-hunting?

APR is arguably the most important, since it’s the number that fairly compares total loan cost across different lenders, unlike the interest rate alone.

Do all mortgages require PMI?

No. PMI is typically only required when your down payment is below 20% of the home’s value on a conventional loan.

What’s the difference between pre-qualification and pre-approval?

Pre-qualification is a rough estimate based on information you provide. Pre-approval requires a credit check and documentation, and is what sellers actually want to see with an offer.