Demystifying Mortgage Terms

The path to homeownership can be both exciting and overwhelming. As you navigate the process, you're likely to encounter a plethora of unfamiliar mortgage-related terms that might seem like a complex maze. To help you make informed decisions and navigate the intricacies of the home loan journey, let's demystify some common mortgage terminology.

While this list is unlikely to make you a mortgage expert, it can be helpful and make it easier to follow conversations with your real estate agent and your lender.

Annual Percentage Rate (APR):

The Annual Percentage Rate is the rate of interest to be paid on a loan's projected life. Sometimes it is referred to as the "true" rate of interest.


An appraisal is a professional assessment of a property's value. Lenders often require appraisals to ensure the property's value aligns with the loan amount. These assessments are conducted by licensed appraisers and are essential for determining the fair market value of a property.

Debt-to-Income Ratio (DTI):

Debt-to-income ratio is a crucial metric that lenders use to determine whether a person is qualified for a mortgage. It's the total amount of debt, including credit cards and other loans, divided by the total gross monthly income. This ratio helps lenders evaluate your ability to manage your existing debts while taking on a new mortgage. A lower DTI ratio may strengthen your mortgage application.


Equity is the homeowner's stake in the property. It's the difference between the market value of a house and the remaining amount owed on the mortgage. As you pay down your mortgage, your equity may increase.


Escrow involves money and documents deposited in a trust account to be held by one party for another. It is commonly used by brokers to hold deposit money before closing. Escrow is also used by lenders to hold money for taxes and insurance on a home.

Loan-to-Value Ratio (LTV):

The Loan-to-Value Ratio is the proportion of the loan amount to the property's purchase price (or appraised value in the case of a refinance). A lower LTV ratio indicates a smaller mortgage relative to the property value, which may be favorable for securing better loan terms.

Mortgage Insurance (MI):

Mortgage Insurance protects the lender in case the borrower defaults on the loan. MI may be required, depending on the lender.


PITI is an acronym representing the four components of your monthly mortgage payment: Principal, Interest, Taxes, and Insurance.

  • The principal is the portion of the monthly payment used to reduce the loan balance.
  • Interest is the fee charged for borrowing money. 
  • Taxes refer to the property taxes paid by the homeowner.
  • Insurance refers to homeowner's insurance, purchased by the borrower and required by the lender, to protect the property against loss from fire and other hazards. 

These payments are often combined and held in an escrow account, simplifying the management of these expenses.


Before house hunting, potential buyers often undergo pre-qualification. A process by which a potential homebuyer qualifies for a home mortgage before making an offer on a house. A lending institution agrees to make a loan in a specified amount to the person it has pre-qualified. It helps you set a realistic budget and strengthens your position when making an offer.

Truth in Lending Act (TILA):

The Truth In Lending Act (TILA) is a federal law designed to protect consumers by ensuring transparent disclosure of all terms and costs associated with a mortgage. Lenders provide borrowers with a standardized Loan Estimate, making it easier to compare offers and understand the true cost of borrowing. Borrowers also receive a Closing Disclosure which provides final details about the mortgage including loan terms, projected monthly payments, and fees and closing costs that are to be paid.

Navigating the world of mortgages becomes less daunting when armed with a clear understanding of these key terms. By empowering yourself with knowledge, you'll be better equipped to make informed decisions on your journey to homeownership. Remember, a well-informed borrower is a confident borrower.

At Supreme Lending, we understand that navigating the world of mortgages can be overwhelming, especially for first-time homebuyers. That's why we have a team of dedicated mortgage professionals here to make the process smooth and hassle-free. Whether you're looking to buy your first home or refinance your current one, we’ll be here to guide you through every step of your home financing journey.