A mortgage is a loan used to buy a home, where the home itself serves as collateral (the asset a lender can take if the loan isn’t repaid). If you understand a handful of core terms, most of the paperwork stops feeling like a foreign language. This article is a plain-English glossary of the words you’ll see again and again.
Principal. The amount you actually borrow. If you buy a $400,000 home and put $80,000 down, your starting principal is $320,000. Over time, part of each payment reduces this balance.
Interest. The cost of borrowing, expressed as a rate (for example, an annual percentage). Interest is calculated on your remaining principal, so it’s highest early in the loan when the balance is largest.
Term. The length of time you have to repay the loan. The most common terms are 30 years and 15 years. A longer term usually means a lower monthly payment but more total interest paid over the life of the loan; a shorter term means higher payments but less total interest.
Down payment. The cash you pay upfront, expressed as a percentage of the purchase price. A larger down payment lowers the amount you borrow and can affect your rate and whether you need mortgage insurance.
PITI. A shorthand for the four parts of a typical monthly housing payment:
Thinking in PITI (rather than just principal and interest) gives you a truer picture of your monthly cost.
Escrow. An account your lender uses to collect and hold the “T” and “I” portions of PITI. Instead of paying property taxes and insurance in large lump sums, you pay a bit each month into escrow, and the servicer pays those bills when they come due.
Amortization. The schedule that shows how each payment splits between interest and principal over the full term. Early on, most of your payment goes toward interest; later, more goes toward principal. An amortization schedule maps this shift month by month.
LTV (loan-to-value). The loan amount divided by the home’s value, shown as a percentage. Borrow $320,000 on a $400,000 home and your LTV is 80%. Lower LTV generally signals lower risk to a lender.
DTI (debt-to-income). Your monthly debt payments divided by your gross monthly income. Lenders use DTI to gauge whether you can comfortably take on a mortgage payment. Lower DTI generally strengthens an application.
Points (discount points). An optional upfront fee you can pay to lower your interest rate. One point typically costs 1% of the loan amount. Points can make sense if you plan to keep the loan long enough to recoup the cost, but the math varies by situation.
PMI (private mortgage insurance). On a conventional loan with less than 20% down, lenders typically require PMI, which protects the lender (not you) if you stop paying. It’s usually added to your monthly payment and can often be removed once you build enough equity (the share of the home you own outright).
These terms interact. A bigger down payment lowers your principal and LTV, which can reduce or eliminate PMI and may improve your rate. A shorter term raises the monthly payment but cuts total interest. Focusing only on the interest rate misses the fuller picture that PITI, LTV, and DTI provide.
A mortgage is easier to evaluate once the vocabulary clicks. Principal and interest are the loan itself; taxes and insurance round out your true monthly cost through PITI and escrow; and LTV, DTI, points, and PMI describe how lenders price and structure the deal. Knowing these terms helps you read any loan document and ask better questions, including your Loan Estimate.