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Amortization describes the process of paying off a loan, such as a mortgage, in installment payments over a period of time. Part of each payment goes toward the principal (the amount borrowed), while the other portion goes toward interest. A typical home loan might amortize over a 15- or 30-year term, with the amount allocated to interest and principal decreasing and increasing, respectively, over the term. When a loan is fully amortized, or mature, that means it’s been paid off entirely by the end of the amortization schedule.

APR, or annual percentage rate, reflects the cost of borrowing a mortgage. A broader measure than the interest rate alone, the APR includes the interest rate, discount points and other fees that come with the loan. The APR is higher than the interest rate and is a better gauge of the true cost of the loan.

A conforming loan is a mortgage that meets the guidelines and loan limits set by the Federal Housing Finance Agency (FHFA). The guidelines include criteria for the borrower’s creditworthiness, debt-to-income ratio and down payment. The loan limits, which change annually and vary by county, dictate the maximum loan amount that government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are willing to purchase or guarantee. By conforming to these guidelines, lenders can sell these loans to Fannie Mae and Freddie Mac, reducing their risk and enabling them to offer better terms to borrowers.

Debt-to-income (DTI) ratio is a measure of a borrower’s ability to repay a mortgage, and is calculated by adding up all of the borrower’s monthly debt payments and dividing the total by the borrower’s gross monthly income. For example, if a borrower’s debt payments total $4,000 a month and their gross monthly income is $10,000, the DTI ratio would be 40 percent.

Earnest money is a deposit a homebuyer makes when entering into a purchase and sale agreement (PSA) for a home, generally as a sign of good-faith intent. The deposit is typically held by a title company in an escrow account. When the home sale closes, the earnest money goes toward the down payment or closing costs. If the sale falls through, the deposit either goes back to the buyer or to the seller, depending on whether the reason for termination was permitted in the PSA.

An escrow account — also called an impound account — is an account that holds the portion of a borrower’s monthly mortgage payment slated for homeowners insurance premiums and property taxes. Escrow accounts also hold the earnest money the buyer deposits between the time their offer has been accepted and the closing. An escrow account for insurance and taxes is usually set up by the mortgage lender or servicer, who makes the insurance and tax payments on the borrower’s behalf. This system assures the lender that those bills get paid.

A loan estimate is a standardized, three-page document containing details about a mortgage, given to a borrower when they apply for a loan. The loan estimate includes estimates of the interest rate, monthly payment and the total closing costs, and also taxes, insurance, prepayment penalties and other important information about the loan. The loan estimate is designed to make it easier for borrowers to compare terms when shopping for a mortgage — receiving one does not mean they’ve been approved or denied for the loan.

The loan-to-valor, or LTV ratio, compares the mortgage amount against the property’s value. An LTV ratio of 80 percent or less — which corresponds to a 20 percent down payment — has been the traditional benchmark for conventional loans; an LTV ratio above 80 percent means you’ll need to purchase mortgage insurance, an extra expense. Some government mortgages, such as FHA or VA loans, permit higher LTV ratios, and may or may not come with the mortgage insurance requirement.

An origination is charged by a lender for initiating, processing and/or underwriting your loan. In most cases, the origination fee on a mortgage amounts to between 0.5 and 1 percent of the total loan amount and must be paid at the time of closing.

Borrowers can purchase dicount points, aka mortgage points, to lower the interest rate on their loan. Typically, one point costs 1 percent of the loan amount and lowers the rate by 0.25 percent (though it can vary by lender). The cost of points is included in the loan estimate, and the borrower pays for them at closing. In general, borrowers buy points to cut interest over the life of the loan, so buying them might only be worthwhile if the borrower stays in the home long enough to offset the upfront cost.

Private mortgage insurance (PMI), is a type of coverage a borrower is required to purchase when making a down payment of less than 20 percent for a conventional loan. PMI protects the lender — not the borrower — from loss if the borrower stops making payments on the loan. When refinancing, PMI is required if the borrower’s home equity is less than 20 percent of the property’s value.

Mortgage underwriting is the process by which a bank or mortgage lender assesses the risk they would be taking by lending to a given borrower. The underwriting process takes into account factors like the borrower’s credit report and score, income, debt and the value of the property they intend to buy. Many lenders follow standard underwriting guidelines from Fannie Mae and Freddie Mac when determining whether to approve a loan.