10 Mortgage Terms First-Time Buyers Should Know

Buying your first home is a big step, but the language that comes with it can feel like a different world. Suddenly you actually have to understand the impact of terms you may have heard for years, like interest rate, escrow, and pre-approval. If you’re buying your first home, it’s normal to feel unsure about what some of these words really mean in a homebuying context or how they affect your decisions.

The good news is you don’t need to become a mortgage expert overnight. Understanding a handful of key terms can help you start getting comfortable with the concepts. That way, you’re not walking into important conversations feeling like you’re totally out of your depth.

In this article, we’ll walk through 10 important mortgage terms every first-time homebuyer should know. These are some of the words you’re most likely to encounter early and often. We’re starting with the basics, so you can build your knowledge from a sound foundation instead of relying on assumptions.

1. Mortgage

Of course, if you’re reading this, it’s probably safe to assume you’ve heard of mortgages. But it’s helpful to start at the ground floor with these terms to build a shared understanding of what they all mean and how they work.

A mortgage is a loan used to purchase a home or other property. Instead of paying the full price upfront, you borrow money from a lender and agree to repay it over time, usually in monthly payments. The home itself serves as collateral, which means the lender has a legal claim to the property until the loan is paid off. In simpler terms, this means that failing to make your mortgage payments can result in you losing your home.

Naturally, the mortgage is the foundation of the entire homebuying process. It determines how much you can afford, how long you’ll be making payments, and what your monthly budget will look like once you move in. Mortgages are essentially a structured way to make homeownership more accessible by spreading the cost over many years.

2. Interest Rate

An interest rate is the cost of borrowing money, expressed as a percentage. When you take out a mortgage, the interest rate determines how much extra you’ll pay to borrow the lender’s money, on top of repaying the original loan amount.

Interest rates matter because they directly affect your monthly mortgage payment and the total amount you’ll pay over the life of the loan. Even a small difference in rate can add up over time, which is why this term comes up so often in conversations about affordability.

As a first-time homebuyer, you’ll likely see interest rates mentioned all over the place. A lot of weight is put on interest rates, but it’s important to remember that rates do not have to be the end-all-be-all of your individual homebuying decisions. Rates are an important piece of the puzzle, but remember, you may be able to secure a different rate later on through refinancing.

3. Down Payment

A down payment is the amount of money you pay upfront toward the purchase of a home. It’s typically expressed as a percentage of the home’s purchase price, with the remaining balance covered by your mortgage loan.

Many first-time buyers assume they need a large down payment to buy a home (20% is a number that gets tossed around a lot). That can make the process feel out of reach. In reality, down payment requirements vary depending on the type of loan and individual circumstances. What you need to know here is that your down payment affects how much you borrow, which in turn influences your monthly payment and overall loan structure.

There are many reasons to consider saving for a higher down payment, but keep in mind that that is one choice of many. Each homebuyer needs to figure out what down payment option makes the most sense for their situation.

4. Pre-Qualification vs. Pre-Approval

Pre-qualification and pre-approval are both early steps that help you understand how much you may be able to borrow, but they are not the same thing. Pre-qualification is usually a quick estimate based on basic financial information you provide, such as income and debts. It can give you a general idea of your price range, but it is not a firm commitment.

Pre-approval goes a step further. It typically involves a more detailed review of your financial information and credit history, which allows a lender to determine how much they may be willing to lend you, subject to certain conditions. Because it carries more weight, pre-approval is often viewed more favorably by sellers when you’re ready to make an offer.

5. Loan Term

The word “term” itself has a distinct meaning in the lending industry. The loan term is the length of time you have to repay your mortgage. Common mortgage loan terms are 15 or 30 years, although other options may be available from some lenders. The term you choose affects both your monthly payment and how much interest you pay over time.

A longer loan term typically means lower monthly payments than a shorter term, but more interest paid overall. A shorter loan term often results in higher monthly payments, but less interest paid across the life of the loan. There is no one-size-fits-all choice.

6. Fixed-Rate Mortgage vs. Adjustable-Rate Mortgage (ARM)

A fixed-rate mortgage has an interest rate that stays the same for the entire life of the loan. This means your principal and interest payment are usually more predictable from month to month, which many first-time homebuyers find reassuring.

An adjustable-rate mortgage, often called an ARM, has an interest rate that can change over time. Typically, the rate is fixed for an initial period and then adjusts periodically based on market conditions. This structure can make the loan look different over time, which is why it’s important to understand how adjustments work.

When comparing these terms, it’s important that buyers consider what fits their situation. There are many reasons to consider each of these loan structures depending on your goals and financial needs.

7. Principal

The principal is the amount of money you borrow to buy your home, not including interest. If you take out a mortgage for a specific dollar amount, that number is your principal at the start of the loan.

Over time, as you make monthly payments, a portion of each payment goes toward reducing the principal balance. Early in the loan, a larger share of your payment typically goes toward interest, with more of it going toward principal later on.

8. Escrow

Escrow is an account used to hold money for certain housing-related expenses, most commonly property taxes and homeowners insurance. Instead of paying those costs separately, a portion of your monthly mortgage payment may be set aside in escrow so those bills can be paid when they’re due. If you make an earnest money deposit to your seller, you may also use an escrow account there.

While the balance in your escrow account can change from time to time, its purpose is to help ensure important obligations are paid on schedule. You’ll typically encounter escrow details when reviewing your loan documents and monthly payment breakdown, which is why understanding its role can help prevent confusion later.

9. Closing Costs

Closing costs are fees and expenses associated with finalizing your home purchase and mortgage loan. These costs are separate from your down payment and are usually paid at the closing of the transaction.

Closing costs can include items such as lender fees, title services, and other administrative expenses required to complete the purchase. While the specific costs vary, it’s important to plan for them as part of your overall homebuying budget.

10. Monthly Mortgage Payment

Your monthly mortgage payment is the amount you pay each month to keep your loan in good standing. It typically includes principal and interest, and may also include property taxes and homeowners insurance if those are paid through escrow. You may also have heard the acronym “PITI,” which means principle, interest, taxes, and insurance, to describe this.

Final Thoughts

Learning mortgage terminology can feel like one more hurdle in an already complex homebuying process, but understanding these key terms gives you a stronger foundation. That foundation will help you follow conversations more easily, review documents with greater clarity, and feel more confident as you move forward.

Keep in mind that you don’t need to know every mortgage term before buying your first home. That can be helpful, but really, you should aim to at least know enough to ask questions, recognize what’s being discussed, and make informed decisions that align with your goals. Your lending team should be able to help you fill in the gaps.

Homeownership is a big milestone, so taking the time to learn the basics is a worthwhile investment.

Disclaimer: Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.