Mortgage Terms and their Meanings

Sep 20, 2023

When it comes to mortgages, there are many terms and jargon that can be confusing for first-time homebuyers or even experienced homeowners. Understanding these terms is essential to make informed decisions about your mortgage. In this blog post, we will explore some common mortgage terms and their meanings to help you navigate the world of home financing.

1. Down Payment

A down payment is the initial payment made by the borrower when purchasing a home. It is usually a percentage of the total purchase price. For example, if you are buying a house worth $300,000 and the down payment required is 20%, you will need to pay $60,000 upfront.

down payment

2. Interest Rate

The interest rate is the percentage charged by the lender for borrowing the money. It determines the cost of your mortgage over time. A lower interest rate means lower monthly payments and less interest paid over the life of the loan.

interest rate

3. Amortization

Amortization refers to the process of paying off a mortgage over time through regular payments. It includes both the principal (the amount borrowed) and the interest. The amortization period is the length of time it takes to repay the mortgage in full.


4. Closing Costs

Closing costs are the fees and expenses associated with finalizing a mortgage. These costs include appraisal fees, attorney fees, title insurance, and more. It's important to budget for closing costs when planning to purchase a home.

closing costs

5. Equity

Equity is the value of your home minus any outstanding mortgage balance. As you make mortgage payments and the value of your home appreciates, your equity increases. Equity can be used to access funds through a home equity loan or line of credit.


6. Escrow

Escrow refers to a financial arrangement where a third party holds and manages funds, such as property taxes and insurance premiums, on behalf of the borrower. The lender typically requires an escrow account to ensure these expenses are paid.

7. Pre-approval

Pre-approval is the process of getting a preliminary commitment from a lender for a mortgage loan. It involves submitting financial documentation and credit history to determine the maximum loan amount you qualify for. Pre-approval can strengthen your offer when buying a home.



MGP stands for Mortgage Guarantee Premium. It is required by lenders when the down payment is less than 25% of the home's purchase price. MGP protects the lender in case the borrower defaults on the loan. It is an additional cost added to the processing fees.


9. Refinancing

Refinancing is the process of replacing an existing mortgage with a new one, usually to take advantage of lower interest rates or change the loan term. It can help reduce monthly payments, shorten the loan term, or access equity in the home.

10. APR

APR stands for Annual Percentage Rate. It represents the true cost of borrowing, including both the interest rate and any additional fees or charges. The APR allows borrowers to compare mortgage offers from different lenders accurately.


Understanding these mortgage terms will empower you to make informed decisions about your home financing. If you have any questions or need further clarification, don't hesitate to reach out to a mortgage professional. Happy home buying!