Mortgage Terms Explained in Plain English

Mortgage terms explained in plain English is one of the most useful things I can offer a first-time buyer. The language of lending can feel like a second language, and nobody should have to nod along at a closing table while quietly wondering what a word means. Here are the terms I explain most often, grouped by where you will run into them.

Principal and interest. Principal is the amount you borrowed. Interest is what the lender charges you for borrowing it. Each month, part of your payment goes to each.

Amortization. The CFPB defines it as paying off a loan with regular payments over time, so that the amount you owe decreases with each payment. Here is the logic with no rates needed. Early in the loan your balance is high, so most of each payment covers interest and a smaller piece reduces principal. As the balance falls, you owe less interest each month, so more of the same payment goes to principal. Near the end, most of your payment is paying off the last of the principal. That is why extra principal early in a loan has such a strong effect, which I discuss in my article on bi-weekly mortgage payments.

What does PITI mean?

It stands for principal, interest, taxes and insurance. The CFPB calls these the four basic elements of a monthly mortgage payment.

What is the difference between a Loan Estimate and a Closing Disclosure?

The Loan Estimate is a three-page form you receive after applying, showing expected terms and costs. The Closing Disclosure is a five-page form with the final details, due three business days before closing.

Is escrow required?

Not always. The CFPB says an escrow account can be required by your lender or chosen by you. Ask your loan officer whether your loan type requires one.

Does PMI protect me?

No. PMI protects the lender. It lets you buy with a smaller down payment on a conventional loan, but it does not protect you if you fall behind on payments.