Simple Mortgage Terms Explained

What Is a Mortgage?

A mortgage is a loan you use to buy a home.
You borrow money from a lender, and you pay it back over time (usually 15 or 30 years) with interest.
The home is the collateral — meaning the lender can take it if the loan isn’t repaid.

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

DTI stands for Debt-to-Income Ratio.
It measures how much of your monthly income goes toward debt payments.

Formula:
Your monthly debt payments ÷ your monthly income = DTI%

Lenders use DTI to decide if you can afford a mortgage.
Lower DTI = better chances of getting approved.

What Is a Credit Score?

Your credit score is a number (300–850) that shows how responsibly you manage debt.
Higher scores help you get better mortgage rates.

What Is a Down Payment?

A down payment is the money you pay upfront when buying a home.
Common amounts: 3%, 5%, 10%, or 20% of the home price.

A bigger down payment can lower your monthly mortgage payment.

What Is Home Equity?

Home equity is the part of your home that you own — not the bank.

Formula:
Home value − mortgage balance = equity

What Is a Pre-Approval?

A mortgage pre-approval is a letter from a lender saying how much they’re willing to lend you based on your income, credit, and finances.
It shows sellers you’re a serious buyer.

What Is an Interest Rate?

Your interest rate is the cost of borrowing money.
Lower rate = lower monthly payments.

Fixed vs. Adjustable Rates

Fixed-Rate Mortgage

• Same interest rate for the entire loan

• Stable monthly payments

Adjustable-Rate Mortgage (ARM)

• Rate can change after a set period

• May start lower but can increase later