Updated: Apr 02, 2024

The Terms You Need to Know to Buy a House

If you're getting ready to buy a home, here's a list of the major terms you should know before entering into a mortgage.
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We've been talking a lot about preparing your finances to buy a home lately. But there's a lot more that goes into buying a home than getting your money ready. In fact, simply understanding the words you'll hear thrown around during your home buying process can be a huge hurdle.

We've enlisted some help on this from our friends at Morty, the world's first fully digital, fully automated mortgage broker. They've compiled some of the most important terms you'll hear throughout your mortgage process so you can start out ahead of the game. Make sure you visit this glossary often as you go from new home-shopper to proud home-owner!

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage is a type of mortgage in which the interest rate varies over the life of the loan. Lenders may offer a low fixed rate for the first few years of a mortgage, but at some date in the future, the rate will likely change based on an index rate.

Practically speaking, this means your monthly payment will likely change at some point. Since mortgage interest rates are historically low now, having an adjustable rate mortgage means there’s a good chance your monthly payment amount will go up in the future.

Most adjustable rate mortgages have a cap on how much higher that interest rate can go. The mortgage lender will also have a set schedule for how frequently the mortgage interest rate is recalculated. This schedule depends on the terms of your mortgage. The adjustment of the interest rate could happen just once, or it could happen yearly for the life of your loan. If you enter into this type of mortgage, make sure you read all the fine print so you know what you're signing up for.

Annual Percentage Rate (APR)

If you’ve got credit cards, this term is probably familiar to you. Annual Percentage Rate (or APR) is the rate of interest that will need to be paid back to the mortgage lender. You can think of it as the cost of borrowing money to pay for your home.

The higher the APR, the more money you'll pay for your home (unless you pay it off early). APR can be fixed or it can be adjustable, depending on the type of mortgage you get.


An appraisal is an informed estimate of what a home is worth.

This worth is decided by a professional appraiser. What they do is take a look at the property and come up with an estimated value based on a home inspection. They will also research the cost of comparable homes that have sold recently and take that into account.

Closing Costs

These are the costs and fees a buyer has to pay during the home-buying process.

Closing costs can include fees for professionals like attorneys, appraisers, inspectors, and surveyors. They can also include costs for processing paperwork or looking up records. The closing costs can add up to somewhere between 2% and 5% of the total cost of your home.

Debt-to-Income Ratio

Lenders consider many factors when trying to determine whether a potential borrower is able to repay a loan. One factor mortgage lenders almost always look at is a borrower’s debt-to-income ratio.

To figure this ratio out, the lender calculates the amount of money a potential borrower would need each month to keep up with all their debt, including the new mortgage. Then, the lender compares that amount to the borrower’s monthly income. The expense figure is divided by the income figure, and the result is displayed as a percentage. The higher that percentage, the riskier the loan is.

Fixed Rate Mortgage

A fixed rate mortgage is a mortgage in which the interest rate does not change. The rate is negotiated right at the beginning and remains fixed from then on out.

Fixed rate mortgages can be as short as ten years or as long as forty. Many people take out a 30 year fixed rate mortgage. These types of mortgages offer predictable monthly payment amounts for borrowers. However, borrowers might end up paying more interest for that predictability, as some adjustable rate mortgages could advertise a lower rate to start with.

Homeowner's Insurance

Before a sale can close on a home, the buyer must secure property insurance on the home.

The reason for this is simple. Your lender wants to be sure they’ll be able to get back the money they loaned you to purchase the home. And if something terrible happens to the house, you (or the lender) wouldn’t be able to sell the home to recoup the loss. Homeowner's insurance can cover certain repairs to bring the home back to functional after unexpected events.

Jumbo Loan

A jumbo loan is a mortgage in an amount higher than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. (You may have heard these referred to as Fannie Mae and Freddie Mac in the past.)

In most US countries, loans for more than $417,000 are considered jumbo loans. Since jumbo loans can’t be sold to Fannie Mae and Freddie Mac, they usually come with higher interest rates and sometimes additional fees.

Origination Fee

An origination fee is charged by the lender upfront. This fee is for processing a loan application and putting the loan in place.

Origination fees can cover an application fee, appraisal fees, fees for follow-up work, or other costs associated with putting a mortgage loan together. It’s usually about 1% of the total mortgage, though it varies depending on the size of the mortgage.


Pre-approval involves submitting a mortgage application and providing the lender with your personal records documenting your income and assets. You’ll usually have to pay an application fee for this.

The lender will then pull your credit report and review your records. If you qualify for a mortgage, the lender will provide you an amount they’d be willing to finance for you. They'll also provide the potential interest rate they’d be able to offer. This will give you a rough monthly estimate of what the mortgage will be should you complete the process.

Pre-approval lets sellers know that you are a serious and qualified buyer. In markets with lots of competition for homes, buyers who have their financing in order have the edge. Pre-approval can show sellers that you can afford the home and that you’re ready to follow through with the purchase, helping you close the deal.


Pre-qualification is a step you can take prior to pre-approval. This helps you understand a general idea of what your finances might look like if you take out a mortgage.

To get pre-qualified, you would provide an estimate of your income, debt, and assets. The lender will review and let you know of terms they might be willing to offer you.

Even though this is a helpful first step, the terms you pre-qualify for are not a guarantee. They are simply meant to help you understand what you can likely afford to buy. You won't know for sure what loan terms you'll really qualify for until you're pre-approved.


Title is a legal term meaning you own the right to something. For a home, having the title means you own the property and have the right to access the land or modify the property as you please. It also means you have the right to sell or otherwise transfer your interests in the property to others.

A property deed is the paperwork that transfers the title from the home seller to the home buyer. When you buy a home, you end up with the title and the deed, though they’re not technically the same thing.

Title Insurance

When we’re talking about hundreds of thousands of dollars, it's imperative that there not be concerns about who has the title for a property. Title insurance policies guarantee that an owner has the title to a property and can legally transfer that title to someone else.

If any issues pop up, the title insurer pays the legal damages. A title insurance policy may protect the mortgage lender, the home buyer or both, but most mortgage lenders will require it.

Author Bio: This post is by the people behind Morty, the world’s first fully digital and fully automated mortgage platform. Morty gives you one-stop-shop access to many different lenders so you can transparently find the right loan at the best price. Check them out on Twitter or Facebook or leave questions for them in the comments below.