Glossary

APR (Annual Percentage Rate)

The yearly cost of a loan, expressed as a percentage. For mortgages, APR includes interest plus origination fees and certain closing costs — so APR is typically higher than the note rate. APY (Annual Percentage Yield) is the same concept for deposit accounts.

Amortization

The process of paying down a loan over time with fixed periodic payments, where each payment is split between interest and principal. Early in the schedule, most of each payment is interest; late in the schedule, most is principal. The “crossover” is the month where principal first exceeds interest.

ARM (Adjustable-Rate Mortgage)

A mortgage with an interest rate that can change after an initial fixed period. Written as e.g. 5/1 ARM: 5 years fixed, then resets annually. The reset is tied to a public index (SOFR, Treasury) plus a margin. Compare to a fixed-rate mortgage where the rate never changes.

DTI (Debt-to-Income ratio)

Monthly debt payments divided by gross monthly income. Conventional underwriting often caps front-end DTI (housing only) at 28% and back-end DTI (all debt) at 36% — the “28/36 rule.”

LTV (Loan-to-Value ratio)

Loan amount divided by home value, expressed as a percentage. LTV ≥ 80% on a conventional loan requires PMI. Federal regulations require lenders to automatically terminate PMI when LTV reaches 78% of the original home value, based on the original amortization schedule.

PMI vs MIP

Private Mortgage Insurance (PMI) protects the lender on a conventional loan when the borrower puts down less than 20%. It can be removed once equity reaches 22% (i.e. LTV 78%). Mortgage Insurance Premium (MIP) is the analogous charge on FHA loans — and for loans originated after June 2013 with LTV ≥ 90%, MIP lasts for the life of the loan.

Points (discount points)

Optional up-front fee paid to the lender to reduce the interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. Whether points pay off depends on how long you hold the loan — break-even is usually 5-8 years.

Property tax (effective rate)

Annual property tax divided by home value. Differs from the statutory mill rate after assessments, homestead exemptions, and local credits. State medians range from ~0.3% (Hawaii) to ~2.2% (New Jersey).

Refinance vs Recast

Refinance replaces the existing loan with a new one (new rate, new term, closing costs). Recast keeps the existing loan but recomputes the monthly payment after a large principal prepayment — typically with a small fee, no underwriting, no closing costs. Recast lowers the payment but doesn't shorten the term.

Top marginal rate

The tax rate paid on the last dollar of income — applied only to the top bracket. The effective rate (total tax ÷ total income) is always lower than the top marginal rate in a progressive system.

Glossary entries expand over time. If a term you need is missing, suggest it via the contact page.