What is DTI (Debt-to-Income Ratio)?

The percentage of your gross monthly income that goes toward debt payments, including your future mortgage, car loans, credit cards, and student loans. Most conventional loans require DTI below 43-50%.

Michigan Mortgage Glossary | Essential Loan Terms

Q: What is PMI (Private Mortgage Insurance)?

Insurance that protects the lender if you default on a conventional loan with less than 20% down payment. Costs typically range from 0.3% to 1.5% of the loan amount annually. Can be canceled once you reach 20% equity.

Michigan Mortgage Glossary expert Edward Kalavitz explaining mortgage terms — NMLS #138424

Welcome to my Michigan Mortgage Glossary! Buying a home can be overwhelming with all the unfamiliar terms and acronyms. This Michigan Mortgage Glossary breaks down 75+ essential terms into plain English so you can make informed decisions with confidence. Verify my credentials at NMLS Consumer Access.

Use this Michigan Mortgage Glossary as your go-to reference, and feel free to contact me if you have questions!

Understanding Michigan Mortgage Glossary Terms

Whether you’re a first-time homebuyer, looking to refinance, or simply want to understand your mortgage better, this Michigan Mortgage Glossary is your go-to resource. Each term includes a clear definition, practical examples, related terms, and links to relevant resources.

Use the A–Z navigation below to jump to any letter, or scroll through the complete Michigan Mortgage Glossary.

A — Michigan Mortgage Glossary↑ Back to Top

Adjustable-Rate Mortgage (ARM)🔗

A mortgage with an interest rate that can change periodically based on market conditions. ARMs typically start with a lower rate than fixed-rate mortgages but carry the risk of rate increases. Common types include 5/1 ARM (fixed for 5 years, then adjusts annually).

Example: A 5/1 ARM might start at 6.5% for the first 5 years, then adjust annually based on an index plus a margin.

See also: Fixed-Rate Mortgage, Interest Rate

Amortization🔗

The gradual repayment of a mortgage loan through regular monthly payments that include both principal and interest. Early payments consist mostly of interest, while later payments include more principal.

Example: On a $200,000 loan at 7% over 30 years, your first payment of $1,331 includes about $165 toward principal and $1,166 toward interest.

See also: Principal, Interest Rate

Annual Percentage Rate (APR)🔗

The true cost of borrowing expressed as a yearly rate, including the interest rate plus other costs like origination fees, discount points, and mortgage insurance. APR is always higher than the interest rate.

Example: A loan with a 7% interest rate might have an APR of 7.25% when fees are included.

Appraisal🔗

A professional evaluation of a property’s market value conducted by a licensed appraiser. Lenders require appraisals to ensure the home’s value supports the loan amount.

Example: You’re buying a home for $250,000. The appraisal comes in at $245,000, so the lender will only loan based on the $245,000 appraised value.

Assets🔗

Everything you own that has monetary value, including cash, bank accounts, investments, retirement accounts, real estate, and personal property. Lenders review your assets to verify you have funds for down payment, closing costs, and reserves.

See also: Reserves, Down Payment, Closing Costs

B — Michigan Mortgage Glossary↑ Back to Top

Balloon Mortgage🔗

A mortgage with regular monthly payments for a set period (usually 5–7 years) followed by a large “balloon” payment of the remaining balance. Less common and risky for borrowers.

See also: Refinancing, Fixed-Rate Mortgage

Bridge Loan🔗

A short-term loan used to “bridge” the gap between buying a new home and selling your current one. These temporary loans allow you to use equity from your existing home as a down payment.

See also: Equity, Down Payment

Buy-Down🔗

A financing technique where the borrower or seller pays an upfront fee to reduce (buy down) the interest rate for a specific period or for the life of the loan.

See also: Discount Points, Interest Rate

C — Michigan Mortgage Glossary↑ Back to Top

Cash-Out Refinance🔗

Refinancing your mortgage for more than you currently owe and taking the difference in cash. This allows you to tap into your home’s equity for renovations, debt consolidation, or other expenses.

Example: You owe $150,000 on a home worth $250,000. You refinance for $200,000, pay off the $150,000 balance, and receive $50,000 cash.

See also: Refinancing, Equity, LTV

Closing Costs🔗

Fees and expenses paid at closing when finalizing a mortgage, typically 2–5% of the loan amount. These include appraisal fees, title insurance, attorney fees, origination fees, recording fees, and prepaid items.

Example: On a $200,000 loan, closing costs might range from $4,000 to $10,000.

See also: Origination Fee, Title Insurance, Appraisal

Closing Disclosure (CD)🔗

A five-page document that provides final details about your mortgage loan, including loan terms, projected monthly payments, and closing costs. You must receive this at least 3 business days before closing.

See also: Loan Estimate, Closing Costs

Conforming Loan🔗

A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan amount limits ($806,500 in most areas for 2025). Conforming loans typically offer better rates.

See also: Conventional Loan, Jumbo Loan

Contingency🔗

A condition in a purchase agreement that must be met for the contract to be binding. Common contingencies include financing, appraisal, and inspection contingencies.

See also: Appraisal, Home Inspection, Pre-Approval

Conventional Loan🔗

A mortgage not insured or guaranteed by the federal government (unlike FHA, VA, or USDA loans). These loans typically require higher credit scores and larger down payments but offer competitive rates.

See also: FHA Loan, VA Loan, PMI

Credit Score🔗

A three-digit number (typically 300–850) that represents your creditworthiness. Higher scores (740+) qualify for the best rates, while scores below 620 may face challenges or higher costs.

Example: A borrower with a 780 credit score might get a 6.5% rate, while a 640 score might get 7.5% on the same loan.

See also: DTI, Underwriting

D — Michigan Mortgage Glossary↑ Back to Top

Debt-to-Income Ratio (DTI)🔗

The percentage of your gross monthly income that goes toward debt payments. Lenders use DTI to assess your ability to manage monthly payments. Most conventional loans require DTI below 43–50%.

Example: You earn $6,000/month and have $1,800 in total monthly debts. Your DTI is 30% ($1,800 ÷ $6,000).

See also: Credit Score, Underwriting, Pre-Approval

Discount Points🔗

Prepaid interest paid at closing to lower your mortgage interest rate. Each point costs 1% of the loan amount and typically reduces your rate by 0.25%.

Example: On a $200,000 loan, one point costs $2,000 and might reduce your rate from 7% to 6.75%.

See also: APR, Interest Rate, Closing Costs

Down Payment🔗

The upfront cash payment you make toward the home’s purchase price. Larger down payments (20%+) avoid PMI, qualify for better rates, and reduce monthly payments. Many programs allow as little as 3% down.

Example: On a $250,000 home, a 20% down payment is $50,000, leaving a $200,000 mortgage.

See also: PMI, LTV, FHA Loan

E — Michigan Mortgage Glossary↑ Back to Top

Equity🔗

The difference between your home’s current market value and the amount you owe on your mortgage. Equity builds as you pay down your loan and/or your home appreciates.

Example: Your home is worth $300,000 and you owe $200,000. You have $100,000 in equity (33%).

See also: Cash-Out Refinance, HELOC, LTV

Escrow🔗

1) An account where funds are held by a neutral third party during a real estate transaction. 2) An account maintained by your lender to pay property taxes and homeowners insurance on your behalf.

See also: PITI, Homeowners Insurance

F — Michigan Mortgage Glossary↑ Back to Top

FHA Loan🔗

A mortgage insured by the Federal Housing Administration, designed for low-to-moderate income borrowers. FHA loans allow down payments as low as 3.5%, accept credit scores as low as 580, and have flexible debt-to-income requirements.

See also: Conventional Loan, MIP, Down Payment

Fixed-Rate Mortgage🔗

A mortgage where the interest rate remains the same for the entire loan term, providing predictable monthly payments. Common terms are 15, 20, or 30 years.

Example: A 30-year fixed-rate loan at 7% will always have the same rate and payment amount for all 360 months.

See also: ARM, Interest Rate, Amortization

G↑ Back to Top

Good Faith Estimate (GFE)🔗

A now-outdated document that was replaced by the Loan Estimate in 2015. Previously, lenders provided GFEs to estimate closing costs.

See also: Loan Estimate, Closing Costs

H — Michigan Mortgage Glossary↑ Back to Top

HELOC (Home Equity Line of Credit)🔗

A revolving credit line secured by your home’s equity, allowing you to borrow as needed up to a set limit. Works like a credit card with variable interest rates.

See also: Equity, Cash-Out Refinance

Home Inspection🔗

A thorough examination of a property’s condition by a licensed inspector, typically done before purchase. Covers structure, roof, plumbing, electrical, HVAC, and more.

See also: Appraisal, Contingency

Homeowners Insurance🔗

Insurance that protects your home and belongings against damage or theft, and provides liability coverage. Required by all mortgage lenders.

See also: Escrow, PITI

I — Michigan Mortgage Glossary↑ Back to Top

Interest Rate🔗

The cost of borrowing money, expressed as a percentage of the loan amount. Does not include other loan costs (which are reflected in the APR). Rates vary based on market conditions, credit score, down payment, and loan type.

See also: APR, Fixed-Rate Mortgage, ARM

J — Michigan Mortgage Glossary↑ Back to Top

Jumbo Loan🔗

A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac ($806,500 in most areas for 2025). Typically require higher credit scores, larger down payments, and may have slightly higher rates.

See also: Conforming Loan, Conventional Loan

L — Michigan Mortgage Glossary↑ Back to Top

Loan Estimate🔗

A three-page standardized form that provides important details about the mortgage you’ve requested, including estimated interest rate, monthly payment, and closing costs. You must receive this within 3 business days of applying.

See also: Closing Disclosure, APR, Closing Costs

Loan-to-Value Ratio (LTV)🔗

The ratio of your loan amount to the property’s value, expressed as a percentage. LTV above 80% typically requires private mortgage insurance (PMI) on conventional loans.

Example: A $200,000 loan on a $250,000 home = 80% LTV ($200,000 ÷ $250,000).

See also: PMI, Down Payment, Equity

M — Michigan Mortgage Glossary↑ Back to Top

MIP (Mortgage Insurance Premium)🔗

Insurance required on FHA loans that protects the lender if you default. Unlike PMI on conventional loans, FHA MIP includes both an upfront premium (1.75%) and an annual premium (0.55% for most loans).

See also: FHA Loan, PMI

Mortgage Broker🔗

A licensed professional who acts as an intermediary between borrowers and multiple lenders. Brokers shop your loan among various lenders to find the best rates and terms.

N↑ Back to Top

No-Closing-Cost Mortgage🔗

A mortgage where the lender pays closing costs in exchange for a higher interest rate. Not truly “free”—you pay the costs over time through higher monthly payments.

See also: Closing Costs, Interest Rate

O↑ Back to Top

Origination Fee🔗

A fee charged by the lender for processing your loan application, typically 0.5% to 1% of the loan amount. Included in your closing costs and APR calculation.

See also: APR, Closing Costs

P — Michigan Mortgage Glossary↑ Back to Top

PITI🔗

(Principal, Interest, Taxes, Insurance)

The four components of your total monthly housing payment: loan principal, interest, property taxes, and homeowners insurance.

See also: Escrow, Principal, Homeowners Insurance

PMI (Private Mortgage Insurance)🔗

Insurance that protects the lender (not you) if you default on a conventional loan with less than 20% down payment. Costs typically range from 0.3% to 1.5% of the loan amount annually. Can be canceled at 20% equity.

See also: Down Payment, LTV, Conventional Loan, MIP

Pre-Approval🔗

A lender’s conditional commitment to loan you a specific amount based on verification of your income, assets, credit, and employment. More reliable than pre-qualification.

Example: After reviewing your tax returns, pay stubs, and credit report, the lender pre-approves you for up to $300,000.

See also: Pre-Qualification, Underwriting

Pre-Qualification🔗

An informal estimate of how much you might be able to borrow based on self-reported information. Less reliable than pre-approval.

See also: Pre-Approval

Principal🔗

The original amount borrowed, excluding interest. As you make payments, a portion goes toward principal (reducing your balance) and a portion toward interest.

See also: Amortization, Interest Rate, PITI

R — Michigan Mortgage Glossary↑ Back to Top

Refinancing🔗

Replacing your current mortgage with a new one, typically to get a lower interest rate, change loan terms, switch from ARM to fixed-rate, or access equity (cash-out refinance).

See also: Cash-Out Refinance, Closing Costs

Reserves🔗

Cash or liquid assets you have available after closing, expressed as months of mortgage payments. Lenders may require 2–6 months of reserves.

See also: Assets, Underwriting

S↑ Back to Top

Seller Concessions🔗

A negotiated agreement where the seller pays part of the buyer’s closing costs. Limits vary by loan type: FHA allows up to 6%, VA has no limit, conventional allows 3–9%.

See also: Closing Costs, Contingency

T↑ Back to Top

Title Insurance🔗

Insurance that protects against claims to property ownership. Lender’s title insurance is required; owner’s title insurance is optional but recommended.

See also: Closing Costs

U — Michigan Mortgage Glossary↑ Back to Top

Underwriting🔗

The process where lenders evaluate your financial information to determine if you qualify for a loan. Underwriters review income, assets, credit, employment, property appraisal, and title.

See also: Pre-Approval, DTI, Credit Score

USDA Loan🔗

A mortgage backed by the U.S. Department of Agriculture for properties in eligible rural areas. Offers zero down payment, low mortgage insurance, and competitive rates for borrowers who meet income limits.

See also: FHA Loan, VA Loan, Down Payment

V — Michigan Mortgage Glossary↑ Back to Top

VA Loan🔗

A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses. Offers zero down payment, no PMI, competitive rates, and flexible credit requirements.

See also: FHA Loan, Conventional Loan, Down Payment

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