Common Mortgage Terms to Know

March 15, 2019 | 4 min read | The mortgage process

Terms used when discussing mortgages such as amortization, equity, and margin, may easily confuse people as they are not terms used every day. Here are some of the most common mortgage terms that are important to learn to understand the home buying process better.

Adjustable Rate Mortgage (ARM) 

A mortgage with an interest rate and payments that adjust periodically at scheduled dates. The interest rate will be fixed for a specified period of time, and adjust thereafter. Therefore, the interest rate may go up or down during the adjustment period. Although, most ARMs have a rate cap that limits the amount the interest rate can change, both in an adjustment period and over the life of the loan. For example, a 7/1 ARM has a fixed interest rate for seven years and then adjusts based on the margin and index in subsequent years.

Adjustment Cap

A limit to how much and a variable interest rate (ARM) can increase or decrease in a single adjustment period.

Adjustment Period

The period of time between adjustment dates for an adjustable rate mortgage (ARM).

Amortization Term 

The amount of time required to pay off the loan, expressed in months. For example, a 30-year fixed-rate mortgage has an amortization term of 360 months. Also, adjustable rate mortgage (ARM) loans generally amortize over 30 years or 360 months.

Closing Costs

Costs associated with closing the mortgage deal. Closing costs can include title insurance, escrow fees, processing fees, real estate commissions, transfer taxes and recording fees. All closing costs will be listed on the loan estimate provided by your mortgage company.


Difference between the amount owed on your mortgage and market value of the home. Equity increases over time as you pay down your mortgage. Equity can also increase as the appraised property value increases.

Fixed-Rate Mortgage 

A home loan with a predetermined fixed interest rate for the entire term of the loan.


A financial index is a measurement used to decide how much the annual percentage rate will change at the beginning of each adjustment period for an adjustable rate mortgage (ARM). An Adjustable rate mortgage’s interest rate is called the fully indexed interest rate. Generally, the fully indexed interest rate equals the index value plus or minus a margin. Mortgage companies use various financial index rates including London Interbank Offered Rate (LIBOR) and Treasury-Indexed ARMs (T-Bills).

Loan Estimate

What you receive three days after applying for a mortgage. A loan estimate explains the loan amount, interest rate, estimated monthly payments, closing costs, taxes and insurance, as well as other important loan details. This helps you better understand the terms and conditions of the loan.

Loan-To-Value Ratio (LTV) 

The ratio between the unpaid principal amount of your loan and the appraised value of your collateral. This is expressed as a percentage.


The number of percentage points the mortgage company adds to or subtracts from the index rate to determine the interest rate adjustments. The margin is constant throughout the life of the mortgage and is specified in a promissory note.


Fees paid to the mortgage company in exchange for a lower interest rate. One point equals 1% of the mortgage.


Getting pre-approved means the mortgage company will loan you a certain amount of money at a specified interest rate based on your current financials. The mortgage company analyzes your income and credit score in order to pre-approve a borrower. This is not a final decision and is only valid for about 90 to 120 days. A pre-approval can give you a competitive edge when bidding on properties.


An estimate a mortgage company provides regarding potential loan amount based upon preliminary income and expense information. A pre-qualification is non-binding.

Promissory Note

A written promise to repay a specified amount over a specified period of time.

Rate Lock

Guarantee that an interest rate will not change between the day you lock and the day you close on the loan. A rate lock period typically lasts about 30 to 60 days. Borrowers typically lock-in an interest rate during times of fluctuating rates.


Review of your loan application by a financial institution to evaluate the risk associated with a loan. An underwriter determines if a loan is approved. GuardHill has an in-house underwriting team.