Finance Dictionary

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1 Year Arm

This is a type of loan where the first year has a fixed rate. For every subsequent year, however, the interest rate will change. Typically the first year’s interest rate is lower than a fixed interest rate, but there is a risk of higher interest rates for the remainder of the loan.

10 Year Arm

This is a loan that has a fixed rate for the first 10 years of the loan, typically at a lower rate than a fixed mortgage. After those first 10 years, however, the interest will change once a year, and this rate will most likely go up.

10 Year Fixed Rate Mortgage

With this type of loan, the interest rate and payment will be the same over the life of the loan. If you can afford it, a 10-year fixed-rate mortgage is a great way to build equity relatively quickly. Because you are paying off the loan in 10 years (versus 30 years for example), while interest rates are lower, monthly payments will be higher.

15 Year Fixed Rate Mortgage

This is a loan that has the same interest rate and payment over the loan’s 15-year length. Similar to a 10-year fixed mortgage, your interest rates will be lower and because you’re paying off the loan in 15 years instead of 30, monthly payments will be higher.

2 Year ARM

With this type of loan, the first 2 years have a fixed interest rate which is typically lower than that of a fixed-rate loan. For every subsequent year, however, the interest rate will change, and will likely be higher.

40 Year Fixed Rate Mortgage

With this loan, you will be paying the same interest and payment over the course of the entire loan. Because you will be paying the loan over 40 years instead of the typical 30 years, payments will be lower but you will pay more in interest over the course of the loan.

A:

Acceleration Clause

A clause in a mortgage contract that necessitates the payment of the full mortgage amount if certain conditions are met.

Accrued Interest

Interest that has been earned (or “Accrued”) but has not been paid.

Adjustable Rate Mortgage

An interest rate that can change during the term of the mortgage. The details of these changes can be found in the mortgage contract.

Adjustment Interval

The period of time between interest rate adjustments in an Adjustable Rate Mortgage.

Alimony

A provision paid to a former spouse following a divorce. Also known as Spousal Support”, Alimony is a legal obligation that allows the spouse to live comfortably and pay for all necessities after a divorce.

Amortization

Payments made throughout the term of the loan, with the goal of reducing, and eventually clearing, the debt. Also known as the “Repayment”.

Annual Fee

A fee charged every year for the use of products and services, such as a credit card. Many credit cards and debit cards are available without annual fees, but this benefit may be negated by higher interest rates or fewer benefits.

Annual Percentage Rate

Often abbreviated to “APR”, an Annual Percentage Rate outlines the cost of the credit. It includes fees and interest and is expressed as a percentage, displaying the cost of the credit over the course of a year. US law requires all cards and loans be marketed alongside an accurate APR to allow consumers to compare services and find the right one for them. See “Representative APR” and “Fixed APR”.

Appraisal

A detailed report outlining the value of property, often conducted on homes prior to mortgages being agreed. A lender will use an appraisal to ensure the home is worth the purchase price, thus allowing them to recover costs if it defaults.

Appreciation

Property “appreciates” when it increases in value, typically as a result of rising market value.

Arbitration

The resolution of a debt or debt-related issue with the help of an impartial third party.

Asking Price

The “sticker price” of a home. A prospective buyer should use the asking price as a guide and a starting point for negotiations. Many homes sell for less but may sell for more if there is a lot of interest and this triggers a Bidding War.

Asset

An item that has significant value and can be used to clear debts or provide collateral. Assets include real estate, businesses, and vehicles.

Assignment

When a lender assigns a loan and all of its rights to a different lender. The details of the loan and the borrower’s obligations towards that loan don’t change.

Assumable Mortgage

A mortgage is “assumable” when it can be acquired by a third-party, as is the case with many USDA and FHA home loans.

Assumption Clause

An assumption clause is placed on an Assumable Mortgage to dictate a specific set of rules. Can include an Approval Clause, which demands initial approval before a mortgage can be assumed, or an Indemnity Clause, which requires the person(s) assuming the mortgage to agree to the original borrower’s obligations.

Auto Finance

A finance program offered to help individuals purchase a new vehicle.

Auto Insurance

An Insurance Policy for a vehicle that covers the policyholder in the event of an unexpected outcome. See Collision Insurance and Comprehensive Insurance.

Auto Refinance

A secondary loan or financial agreement assumed with the intent of paying off the original Auto Finance.

Automated Clearinghouse

The ACH is a network that facilitates electronic fund transfers, allowing payments to be made between lenders and borrowers.

B:

Balance

In relation to debt, the Balance is the amount of debt still owed and an amount that must be paid before the debt is cleared.

Balloon Payment

A large repayment to cover most or all of the loan’s principal, often at the end of a loan period.

Can also include “Balloon Mortgage”, whereby small payments are followed by a large sum to cover the principle.

Bankruptcy

A legal procedure governed by US Bankruptcy Code. A debtor may use this process to create an agreement with their creditors. There are several different forms of bankruptcy available, with all personal forms remaining on a debtor’s Credit Report for 10 years. See Chapter 7, Chapter 11, and Chapter 13 Bankruptcy for more information.

Better Business Bureau

The BBB is a non-profit organization that provides resources to both businesses and consumers, operating as a platform for reviews and complaints.

Bidding War

An instance in which two or more prospective buyers are seeking to buy the same house and try to outbid each other by making repeated offers at increasing amounts.

Borrower

Someone who buys a product or a service (such as a house or car) using credit.

Break-Even Point

This term is often used to refer to the point whereby the savings provided by refinancing are able to cover the cost of that refinancing.

Bridge Loan

A small short-term learn offered to cover the borrower until they can secure the financing they need.

Broker

A person whose job it is to arrange financing on behalf of their client. The Broker will typically earn a commission for each client they refer to a specific lender, allowing them to offer their services without an upfront fee.

Business Capital

The funds required by a business in order to continue operating as usual.

Business Credit

Used by lenders, as well as suppliers, to determine the trustworthiness and creditworthiness of a business.

Business Credit Card

A credit card offered to a business that can be used to purchase goods for resale or to fund existing operations. Business credit cards come with more requirements than personal credit cards but also offer additional features, such as higher limits and the ability to produce cards in multiple names and for multiple members of the company.

Buydown

The act of paying a larger sum of money upfront to greatly reduce the cost of an interest rate and to reduce the amount of money that needs to be paid back.

C:

Car Annual Percentage Rate

An APR (see Annual Percentage Rate) on a car loan. This figure givers the borrower an idea of how much they need to repay and allows them to easily compare this loan to others.

Car Down Payment

The money paid upfront when acquiring a car loan. The higher the amount, the less interest needs to be paid in the future and the better the deal will be.

Car Rebates

A cash sum offered to a buyer by a manufacturer as a way of increasing sales.

Cash Back Auto Refinances

Borrowers can receive cash sums when they refinance a car loan (see Auto Refinance). However, these programs are rarely as beneficial as they seem and borrowers should pay close attention to any changes in the interest rate and terms, ensuring they are beneficial.

Cash Flow

A business term that has also become common in the average person’s lexicon. “Cash flow” is the money that moves in and out of your bank account or business.

Cash Out Refinancing

When a refinance is acquired and the sum exceeds the amount needed to clear the debt, the remaining balance is paid to the borrower.

Chapter 11 Bankruptcy

Bankruptcy filed by businesses keen to reorganize their debts in order to improve profits and stability.

Chapter 13 Bankruptcy

Individuals who earn above a certain amount do not qualify for Chapter 7 Bankruptcy and need for file for Chapter 13. Debt repayment plans are created with the goal of clearing debts within 5 years. Assets do not need to be liquidated if individuals meet the terms of these repayment plans.

Chapter 7 Bankruptcy

A form of bankruptcy offered to individuals with few to no assets. This is the most common type of bankruptcy in the United States and offers complete disposal of all unsecured debt following liquidation of non-exempt assets. Tools needed for work, in addition to main residences, household goods, and clothing, are often exempt.

Closing

Also known as a “Settlement”, this term is used to denote the point at which contracts are exchanged and agreements are made concerning a property exchange.

Closing Costs

The costs associated with the Closing period include loan origination and appraisal fees, insurance, surveys, and taxes. The Closing Costs can be sizeable, often around 5% of the total cost of the mortgage. However, they will differ from person to person and from sale to sale.

Co-signer

A person who signs on your loan/mortgage/card and assumes responsibility for it. If you default and the money cannot be recovered from you, then the lender will look to acquire it from your co-signer.

Collateral

Assets used as leverage against a loan. If the borrower fails to meet the terms of the loan, then these assets may be seized.

Collision Insurance

A type of insurance that pays out following a collision with a vehicle, the sidewalk, a building, or another object.

Commercial Mortgage

A mortgage provided to a business for the purchase of business premises.

Commission

A fee charged by a broker that is taken as a percentage or paid by a third-party. A realtor may charge their fee based on the percentage of the sale; a mortgage broker will earn theirs from the lender.

Competitive Market Analysis

A CMA is conducted by a real estate agent, with a view to determining the market value of a given property. The agent will compare the house to properties that have sold in the area and then use this analysis to arrive at a list price.

Comprehensive Insurance

An auto insurance plan that covers a wide range of possibilities and scenarios, including fire and damage not caused by a collision.

Consolidation

The act of combining several debts into one by acquiring an additional line of credit and then using this to “consolidate” other debts. By consolidating their debt, an individual can typically get a lower interest rate and reduce their monthly outgoings.

Construction Loan

A loan acquired for the purposes of construction and typically advanced as the work on the building progresses.

Consumer Loan

A loan acquired by an individual for the purpose of buying products or services. A consumer loan can be loan Unsecured and Secured and can include a Mortgage, Auto Loan, Credit Card, and Student Loan.

Conventional Mortgage

A mortgage that has not been insured by a government agency.

Conversion Option

An option that borrowers can take to switch from an Adjustable Rate Mortgage to a Fixed Rate Mortgage.

Cooperative Housing

Property that is owned by a corporation and lived in by the stockholders. The resident doesn’t own the property or the land but is given the title to the property and has the right to remain there for as long as they own the stock.

Credit

An amount of money that is owed to a person or a company and used for the purpose of acquiring a product or service, such as a house or a car.

Credit Bureau

Also known as a Consumer Reporting Agency, a Credit Bureau, compiles reports on user credit, which can then be used by lenders to determine the creditworthiness of said user. This data looks at previous credit and takes things such as credit applications, defaults, available credit and used credit into account.

Credit Card

A card with a line of credit that is supplied by a lender, who may then charge fees and interest when that credit is used.

Credit Counseling

A process that can help an individual manage their debt, providing counseling, education, and tools, all of which are geared towards helping them get back into the black.

Credit History

A detailed record of all your active and cleared debts.

Credit Limit

The maximum credit applied to a credit card. An individual typically can’t use the card beyond this limit.

Credit Report

A detailed report of an individual’s credit history that can be used by lenders to determine their creditworthiness. Your Credit Report is very important and can dictate your entire financial future.

Credit Score

A score calculated by inputting data points from an individual’s Credit Report. This score gives individual’s and lenders a quick and easy way to articulate the data in a Credit Report.

Credit Union

A Credit Union operates a lot like a bank in that they provide loans, retain deposits, and offer investment services and solutions, but there are a few major differences. The main difference is that they are not-for-profit, with all profits going back into the business and being used to benefit the Credit Union members, as opposed to stakeholders. It is said that close to 100 million Americans hold over $600 billion in Credit Union savings.

Creditworthiness

The borrower’s ability to pay back the loan, based on factors such as income, credit history, and employment.

Curb Appeal

A term used to denote the aesthetic value of a property as viewed from the exterior. Agents and sellers will often make cosmetic changes to the exterior to increase the curb appeal and thus the overall value.

D:

Debt

Money owed by a Debtor to a Lender. Debt can include the balances of personal loans and auto loans, as well as credit cards and mortgages. Any money owed is classed as debt and can adversely impact a debtor’s Credit Report and Credit Score.

Debt Consolidation

See “Consolidation”. Debt Consolidation refers to the act of “consolidating” debts to reduce interest and create more manageable monthly repayments.

Debt Management Plan

A carefully tailored plan geared towards helping the debtor manage their debts. These plans are often created when the debtor is struggling and they typically make the repayment process easier on them, with reduced interest rates and more manageable repayment dates.

Debt Relief

A procedure aimed at gradually and systematically reducing a debtor’s debts, either by Debt Settlement or Debt Consolidation.

Debt Settlement

A debtor works with a Debt Settlement company to clear their debts, a process that typically takes 2 to 4 years. The company requires the debtor to create a separate account, money from which is then used to negotiate with lenders, offering them a settlement sum in exchange for clearing the debts. Also known as Debt Resolution, this process wipes an average of 50% off a consumer’s debt.

Debt Specialist

A trained professional whose job it is to negotiate debts on behalf of the debtor. They can work for a Debt Settlement company or as an independent.

Debt to Income Ratio

Often referred to as DTI, this ratio is calculated by taking into account a debtor’s monthly income and debt payments. It does not factor in basic amenities and essentials, such as food and living expenses, and focuses purely on debt-related outgoings.

Debtor

A consumer with debt.

Deed

A document that confirms the transfer of property from one individual to another, and then serves as proof of ownership.

Default

A loan enters into a Default state when the terms of the agreement have not been met. The Default will then show on the debtor’s Credit Report and can have a hugely negative impact on their Credit Score. The point at which a debt enters into a Default state will depend on the type of debt. For federal student loans, it’s 270 days.

Deferred Interest

Accrued interest that has not yet been paid, such as when a repayment is not large enough to cover the total interest owed.

Dependent

An individual, such as a child, added to a tax form to qualify for exemptions—they are “Dependent” on you financially.

Deposit

In the event of an asset purchase, a deposit may be required by the seller to cover them in the event that the buyer backs out. In such cases, the deposit will cover a small percentage of the final sale price and will either be subtracted from the price upon completion or paid to the seller if the buyer backs out.

A transaction whereby a consumer places their money into an account.

Depreciation

The opposite of “Appreciation”, this term describes a process by which an asset, such as a house, experiences an organic drop in value.

Direct Loans

Loans that are supported by the William D. Ford Federal Direct Loan Program, giving students and their guardians a chance to borrow money from the Department of Education.

Disbursement

The process by which loans are released to borrowers.

Discount Points

Money that the borrower can pay to the mortgage provider to qualify for a reduced interest rate. A point is 1% of the total value of the mortgage. This means that 1 point on a $200,000 mortgage will equate to $2,000.

Discretionary Income

Also known as “expendable income”, this is the amount of money left over after an individual has covered their taxes, housing costs, food, clothing, and other essential expenses. It is money that they can use to invest, save, or spend on luxuries.

Documentation

During a loan application a lender will request documentation from the borrower, which is then used to determine their creditworthiness. This documentation can relate to their assets and their income, as well as employment, and tells the lender if you are able to meet repayments and, if not, if they can recover the money through other means.

Down Payment

An upfront payment made at the point of the loan to cover the difference between the loan amount and the purchase price, while also covering the cost of additional fees.

E:

Earned Income Credit

An income tax credit created to assist families and individuals operating on low-to-moderate incomes.

Earnest Money

When the buyer gives money to the seller as a way of binding the transaction and guaranteeing that they have the means and intent to pay the full purchase price.

Equal Credit Opportunity Act

An equal rights law that forces lenders to offer credit to all consumers equally, never taking ethnicity, religion or gender into consideration. They are also advised not to discount people who receive money via public assistance programs.

Equifax

One of the three major Credit Bureaus. Equifax was founded in 1899 and collects data on over 800 million people and close to 100 million businesses all over the world. The company is headquartered in Atlanta, Georgia, and trades on the New York Stock Exchange.

Equipment Financing

Money lent to a business for the purpose of buying commercial equipment.

Equity

A figure that represents the difference between the value of an asset and the debt against it. A homeowner is in “negative equity”, for instance, if the house has depreciated and the mortgage debt is greater than the market value.

Escrow

A secure financial service often used to buy and sell homes. The buyer places their money within a third-party account; the seller releases the deeds and completes the sale; the third-party completes the transaction by moving the funds to the seller. The third-party is always neutral and impartial and it is their job to ensure that the sale is completed successfully.

Experian

One of the three major Credit Bureaus. Experian was founded in 1996 and has headquarters all over the world, gathering financial data on over 1 billion people.

F:

Fair Credit Reporting Act

The FCRA was established to promote fairness and ensure accurate credit reports are created and can be disputed when errors arise.

Fair Market Value

The price that a particular asset would receive if it was sold.

Federal Collection Policy Notice

A notice given to VA-backed loans to outline the actions that the government can take in the event of a default.

Federal Funds Rate

The interest rate that depository institutions (banks) lend other depository institutions, often on a short-term basis. This rate is very important to the US economy and facilitates the transfer of money between banks that have large reserve balances and those that do not.

Federal Housing Administration

The FHA is a government agency that provides mortgage lenders with insurance, covering them in the event that borrowers default. It was created to provide opportunities for home buyers with low incomes and minimal down payments. The FHA is a self-funding department that has existed since 1934 and has provided many benefits to US home buyers.

FHA Loan Limit: The maximum amount allowed for an FHA loan. This figure varies from location to location.

FHA Down Payment: A down payment of 3.5% is required for FHA loans. This means that a loan of $100,000 would require a down payment of $3,500.

Federal Trade Commission

The FTC was established to promote fairness and ensure consumer’s rights are protected at all times.

FICO Score

A common credit score that provides consumers with a range between 300 and 850, with 300 depicting the worst possible score and 850 the best. FICO stands for Fair Isaac, and Company, although the data analytics company that created this system is now known simply as Fair Isaac Corporation.

Finance Charge

The total cost of applied credit, a cost that would not exist if the asset (such as a home) was bought upfront using cash.

Fixed Rate Interest

An interest rate that is fixed and is therefore not subject to change.

Forbearance

Loan payments are temporarily suspended owing to a borrower’s financial hardship and inability to meet repayments. Interest continues to be charged and added to the balance.

Foreclosure

If mortgage payments are not met then the house may enter Foreclosure, whereby the lender acquires the property and sells it to recover the remainder of the debt. Any funds leftover after the Foreclosure will be transferred to the borrower.

Fraud

A criminal offense involving the use of deception for financial gain, such as when a consumer makes a false insurance claim.

Free Application for Federal Student Aid

A free form that students can use to see what kind of federal student aid they are eligible for.

G:

Garnishment

A legal process whereby an employer withholds part of an employee’s wage and gives it to a creditor. A garnishment order is made by a judge to cover child support, unpaid taxes, student loans, and other debts.

Good Faith Estimate

A form that lenders had to provide to consumers prior to 2015. This form has since been replaced by a Loan Estimate form. The purpose of both is to provide details regarding the loan, covering things such as fees and charges.

Grace Period

A period of time in which no interest or fees are charged.

With a credit card, it refers to the interest-free period that follows a repayment date and applies when a balance is cleared in full.

Where student loans are concerned, a grace period is the time between enrollment and the first payment due date.

Guaranteed Loans

A third-party can “Guarantee” a loan by agreeing to assume the obligations of a debt in the event that a borrower defaults. In doing so, they become the “Guarantor”.

H:

Hardships

Difficulties that prevent an individual from meeting their repayments, including job loss. The lender may initiate a period of Forbearance, in which case a repayment period will be extended but the interest will still be added.

Health Savings Account

A medical savings account offered to US taxpayers enrolled in a high-deductible health plan. Earnings are not subjected to income tax.

Home Affordable Refinance Program

Established in 2009, HARP gave homeowners with little to no Home Equity a chance to refinance their homes at lower rates. The program was set to end in 2016 but was extended to 2017 and then 2018. It is no longer active.

Home Equity

The Equity tied-up in a house. This figure can be calculated by taking the value of the home and subtracting the total mortgage debt. A $100,000 home with an $80,000 mortgage has $20,000 worth of Home Equity.

Home Equity Conversion Mortgage

Also known as a “Reverse Mortgage”, this service is offered to homeowners aged 62 and over, allowing them to convert some of their Home Equity into cash. They can use the cash however they choose and don’t have to pay it back until they sell the house or die.

Home Equity Loan

An additional mortgage taken out against the remaining Home Equity. This “Second Mortgage” is released to the borrower as a lump sum and repaid in agreed-upon installments, often at a Fixed Rate of Interest.

Home Price

Either the value of a home or the sale price, depending on which is lower. See Home Value for more information.

Home Purchase Agreement

An agreement outlining the terms concerning a home purchase.

Home Value

Unlike the Home Price, which is the lowest of either the appraised value or the sale price, the Home Value is the estimated worth based on market value.

Housing and Urban Development Department

Also known as the HUD, this government department contains the Federal Housing Administration (FHA) and sets targets and requirements for all FHA loans.

I:

In-House Financing

When a bank keeps a mortgage for themselves as opposed to selling it to a third-party organization like Freddie Mac or Fannie Mae.

Index

The Index is used by lenders to establish interest rates for Adjustable Rate Mortgages. The Index is published by an impartial party.

Individual Retirement Account

An IRA is a retirement account for pre-tax income, but the money generated through this account is subject to taxes.

Initial Interest Rate

The rate charged on the first day of the loan. Also known as a Starting Rate or Introductory Rate, this rate is subject to change at a later date.

Initial Public Offering

An IPO is when a company launches on the stock exchange, making its stocks available for purchase by investors all over the world. There is an element of uncertainty associated with IPOs and as a result they can be very volatile.

Installment Loan

A loan that is repaid over a specific and predetermined period of time, as agreed upon at the start of the loan.

Installments

An Installment is a payment made periodically with a view to repaying a debt or covering the cost of a product or service over a fixed period.

Interest

The money added to a debt, along with the principal. The debtor covers the interest during the course of the loan and can typically be reduced by making larger repayments.

Interest Cost

The total cost of the interest over the course of the loan. This amount is displayed as a dollar value based on all repayments being met.

Interest Due

The amount of interest due for a given period.

Interest Rate Ceiling

The maximum amount charged on an Adjustable Rate Mortgage through the entire term of the loan.

Interest Rate Decrease Cap

The maximum amount that an interest rate can decrease for Adjustable Rate Mortgages.

Interest Rate Floor

The lowest possible interest rate charged on Adjustable Rate Mortgages.

Interest Rate Increase Cap

The maximum amount that an interest rate can increase for Adjustable Rate Mortgages.

Internal Revenue Service

A government agency that deals with tax and tax regulation in the United States.

Intro Rate

An interest rate applied during a promotional period such as an Introductory Rate (see Initial Interest Rate). The rate may increase once the Intro Rate expires.

L:

Last Month’s Deposits

A business loan application requires details of the businesses’ income in the form of previous deposits.

Lender

A person or company that provides borrowers with funds in the form of a loan, credit card, mortgage, or other form of credit. Lenders include banks and credit unions, as well as credit card providers.

Lender Fees

The money charged by Lenders for processing a loan. Lender Fees do not include money charged via Interest and can include everything from legal fees to application fees.

Liability

A person’s obligation for repaying a loan and for covering all fees associated with that loan.

Lien

The right of a lender to secure a debt against an asset owned by the debtor. The asset will be sold if the terms of the agreement are not met.

Limited Liability Company

A business that does not hold the shareholders responsible for its debts, also known as an LLC.

Limited Partnership

A business owned by two or more individuals. There are benefits to a Limited Partnership that are not available with other business types, including the fact that each partner is only liable for the amount of money that they have invested in the business.

Line of Credit

A type of credit that can be reused again and again, resetting every time that it has been repaid. The most common Lines of Credit are provided by credit cards, but they can also be added to bank accounts in the form of overdrafts.

Liquidation

The assets of a company or individual may need to undergo liquidation following a bankruptcy. In such cases they will sell all of their assets and the money will then be used to pay their creditors and clear their debts.

Liquidation Value

The value of a company’s or individual’s assets when they have been sold and converted into cash.

Liquidity

The ability to exchange assets for cash. An asset is considered highly liquid, or possessing great “liquidity”, when it can quickly be sold.

List Price

The manufacturer’s price for a vehicle. This price can nearly always be negotiated down.

Loan

A cash lump sum offered to a Borrower by a Lender, often for the purpose of purchasing assets (Mortgage, Auto Loan) or clearing debts (Consolidation).

Loan Agreement

A written contract between the Lender and the Borrower outlining details of the loan, including payment terms and dates.

Loan Amount

The total value of the loan, which the debtor is expected to repay throughout its course.

Loan Forgiveness

The act of clearing a debt, including Student Loan Forgiveness, whereby debtors can receive partial or complete debt relief based on a set list of criteria. Loan forgiveness is offered to debtors involved in law enforcement, the military, education, or other jobs in the public sector.

Loan Origination Fee

A fee charged for processing the loan, encompassing things such as documentation, auditing and administering.

Loan Servicing

The administration of a loan, from the point that it is funded until the point that it is paid.

Loan Terms

The terms and conditions of the loan, ones that the borrower and the lender are contractually obliged to follow.

Loan-to-Value Ratio

The difference between the value of a property and the debt levied against it. This ratio is calculated by taking the value of the property and dividing the loan amount.

Lock In

An agreement made between a mortgage provider and a borrower to loan money at a specific rate within a specific time frame. Also known as an Interest Rate Lock.

Lock Period

The period of time in which the Lock In is offered. If this period expires then the rate may not be offered anymore.

M:

Margin

Used in combination with the Index to determine the rate of Adjustable Rate Mortgages.

Master Promissory Note

A legal document that has been signed and contains all the terms and conditions of a loan.

Maximum Loan Amount

The maximum amount of money that a consumer can borrow from a lender. This can be affected by many different things, from the type of program/loan, to the borrower’s income, employment status, credit history and perceived ability to make repayments.

Minimum Payment

The minimum loan payment that an individual needs to make to avoid a default. If more than the minimum payment is made then a higher percentage of the Principal will be paid and the debtor will reduce their interest and total expenses over the lifetime of the loan.

Monthly Debt

All debt that leaves an individual’s account on a monthly basis, covering personal loans, credit cards, and mortgages.

Monthly Payment

The repayments that a borrower makes each month until a debt has been cleared.

Monthly Payment with PI

A monthly payment that includes the principle (P) and the interest (I).

Mortgage

A large loan provided by a lender to allow the borrower to purchase a home. The lender charges interest and uses the house as collateral. If the borrower doesn’t meet the terms of the loan, then the lender may repossess the house, a process known as Foreclosure.

Mortgage Broker

A financial advisor whose role it is to find a suitable mortgage for a borrower. They will typically earn their fee via a Commission, which is provided by the lender.

Mortgage Insurance

An insurance policy taken by the lender to cover them in the event that a borrower doesn’t meet the repayments.

Mortgage Note

A document that obligates a borrower to repay the mortgage at a specified rate and over a specified period of time. As soon as the Mortgage Note is signed, the borrower becomes responsible for the mortgage.

MSRP

The suggested retail price of a vehicle.

Multiple Listing Serving

A database containing information on houses for sale in a specific area.

N:

National Association of Realtors

The largest trade organization in the United States of America, accounting for more than 1.3 million members, all of which are licensed real estate agents and can call themselves “Realtors”. Not all real estate agents in this country are members of the NAR.

Negative Amortization

When repayments are not large enough to cover the interest due it is referred to as Negative Amortization. The interest will be added to the remaining balance, which means the balance will be higher than the previous month and not lower. Negative Amortization can cause additional problems for the debtor, increasing the size of the debt month after month.

Negative Equity

When the debt is larger than the value of the asset. A borrower enters into negative equity, for instance, if they have a house that has depreciated and is worth $200,000, but they have a mortgage of $210,000.

Net Operating Loss

A period in which a company generates more outgoings than incomings.

Net Trade in Value

The money offered by a dealer for an old car. This money can then be used to lower the cost of a new vehicle, reducing the amount of credit needed.

No Credit Business Loans

Loans that are aimed at businesses with poor credit, allowing them to get the funds they need without a great credit history. No Credit Business Loans are especially important for small businesses. They look at things that common lenders don’t take into consideration, including unresolved invoices.

No Credit Loans

Loans offered to individuals with little to no credit. These loans may charge a higher interest rate or more fees; they may offer a smaller line of credit or require some kind of collateral or a co-signer.

No-Doc Mortgage

A defunct mortgage type that didn’t require lenders to record a borrower’s assets or income. These mortgages are now considered illegal and are therefore no longer available.

Non-Conforming Loan

Also known as a Jumbo Loan, a Non-Conforming Loan is one that doesn’t meet requirements outlined by Government Sponsored Enterprises such as Fannie Mae.

O:

Open-End Credit

A loan that has been pre-approved to payout continuously, and not in a lump sum. Open-End Credit is also known as “Revolving Credit”.

Operating Performance Ratio

A figure that can be arrived at by dividing a company’s operating expenses by their net sales. It is used to express the efficiency of an organization.

Owner Financing

A loan that is offered to a prospective buyer by the owner and seller of a property.

Owner’s Equity

The capital of a company that is displayed on a sole proprietorship’s balance sheet. It shows an owner’s investment once the withdrawals have been subtracted and the net income has been added.

P:

Paid in Full

This is displayed on a borrower’s Credit Report to indicate when a debt has been “Paid in Full”, as opposed to being settled or reduced.

Partnership

An agreement made between two or more people outlining the management of a business.

Pension

A sum of money paid incrementally after an individual retires. Pensions can be arranged through Social Security, trade unions, insurance companies, and private companies. They give employees peace of mind, ensuring they have an income to rely upon once they retire.

Personal Loan

A loan that is not secured against an asset, such as a house or a car. The absence of collateral means a Personal Loan has a higher interest rate and less favorable terms than a Mortgage or an Auto Loan.

Piggyback Mortgage

A type of home loan that is acquired alongside an original home loan and using the same collateral.

PITI

Stands for Principal, Interest, Taxes, and Insurance, and essentially covers all aspects of a single mortgage payment.

Points

Mortgages may be listed in “Points”, in which case a single point is equal to 1% of the mortgage total. To understand points, just add a percentage to the number being quoted. For instance, 10 Points equates to 10%, which is $10,000 of a $100,000 mortgage.

Power of Attorney

A document that legally permits one person to make decisions on behalf of another. These decisions can relate to finances as well as health.

Pre-Approved Loan

A loan that is approved before the purchase is made. A Pre-Approved Loan may provide the borrower with extra leverage and will also give them a better idea of what they can afford.

Pre-Approved Mortgage

As with a Pre-Approved Loan, a Pre-Approved Mortgage is offered to the borrower before they purchase a house, giving them an idea of what sort of house they can look for. If, for instance, they are pre-approved for $100,000, they know that to purchase a house for $150,000 they will need a deposit of $50,000, whereas a deposit of $10,000 will allow them to purchase a house for $110,000.

Prepaid Items

Charges that must be paid when the debt is settled.

Prepaids

Paid by the purchaser when buying a house. Prepaids are placed into Escrow and can cover costs related to insurance, taxes, assessments, and other expenses associated with buying a house.

Prepayment

When a debtor makes a repayment ahead of the scheduled date, they are “Prepaying”. This is a tactic that many mortgage experts and debt specialists recommend, as it can reduce the overall cost of the debt, bringing down the interest charges and having a greater impact on the principal. In the past, it wasn’t uncommon for Prepayments to be met with penalty fees, but this is very rarely the case today.

Pre-qualification

A process that can provide a home buyer with a rough mortgage calculation. The buyer provides information pertaining to their income, assets, debts, employment, outgoings, and more, and a broker uses this information to create a non-binding estimate.

Prime Rate

The best rate offered to customers considered the most creditworthy.

Principal

The balance of a loan, not including the interest or fees. The Principal is used to calculate the interest and once this amount has been repaid then the debt will be wiped clean (assuming there are no additional fees or penalties). Debtors can repay their debts quickly by exceeding the Minimum Payment amount, as all additional funds go directly towards the Principal.

Private Mortgage Insurance

A PMI gives homebuyers a chance to purchase a home even if they lack the necessary funds to make a 20% down payment.

Private Sector

An area of industry in which private companies operate. These companies are for-profit, as opposed to government owned.

Profit and Loss Statement

A document that outlines the incomings and outgoings within a company during a specified period of time. The P&L Statement covers incomings such as product and service revenue and compares this to outgoings like staff costs.

Proprietorship

A business type that doesn’t provide a legal distinction between the business owner and the business itself, also known as a Sole Proprietorship.

Public Company

A company that is traded on the stock exchange. This process follows an IPO (see Initial Public Offering) and can occur in markets all over the world.

Public Sector

Unlike the Private Sector, the Public Sector is staffed by government-run agencies established with a view to helping US citizens.

Purchase Option

A Purchase Option is provided to borrowers who are currently leasing an asset, such as a car. It allows them to purchase the asset outright at any point during the lease period, at which point they become the legal owner.

Q:

Qualification

A quick check of an individual’s finances that determines whether or not they will meet the requirements of a loan.

Qualification Ratio

A limit that has been set by a lender to describe the maximum ratios for housing expense/income and debt/income that a borrower is allowed.

Quitclaim Deed

A legal document that absolves all ownership of a piece of real estate by the creator of a deed.

R:

Rate

A percentage that lenders use to calculate the cost of a loan and the size of its repayments. See “Interest” for more information.

Rate and Term Financing

A type of home loan refinancing that reduces the interest rate and the total cost of the loan but doesn’t provide any additional cash or equity.

Real Estate Broker

A financial expert who acts as an intermediary between the buyer and the seller of a property. It is their job to arrange the sale and ensure it goes smoothly.

Realtor

A person tasked with advertising a house on behalf of a seller. A Realtor is an official member of the National Association of Realtors.

Rebate

A Rebate refers to a sum of money that has been returned to an individual, often as a result of an overpayment. It can mean different things in different contexts, however, including:

Refinance

The act of replacing one loan with another, often with the goal of reducing the interest rate or the size of the debt. Debtors are often advised to consider refinancing before anything else and this can have a sizeable impact on a loan and an individual’s debts.

Remaining Interest

The amount of interest still left to pay on a loan at any given time.

Repossession

An asset such as a home can be repossessed by the lender when the borrower stops making repayments.

Required Cash

The money required to complete the purchase of a home after the mortgage has been accounted for. If the agreed-upon house price is $120,000 and the mortgage is $100,000, then the Required Cash amount is $20,000.

Residual Interest

The interest that accumulates in the timeframe between a bill being sent and a payment being received. In the event that a repayment has been made on time, there should be no Residual Interest.

Retained Earnings

The earnings that a company retains for reinvestment purposes.

Retirement

An individual retires when they quit full-time work. If they have a Pension then this is when they will start receiving it.

Return on Investment

An ROI calculates the money received from an investment when compared to the cost of that investment. If the ROI is high, then the investment was successful.

Reverse Mortgage

See “Home Equity Conversion Mortgage”. This is a type of loan offered to householders aged 62 or above, provided in exchange for partial ownership of the home-owner’s property.

Revolving Debt

See Open-End Credit, this is a type of debt that is constant and repeating, just like credit card debt.

S:

S-Corporation

A small business that doesn’t pay any income tax, but simply diverts all profit through shareholders who then report their individual shares on their personal income tax statements.

Sales Tax Percentage

A tax paid on goods and services that is used to benefit local government. The sales tax rate differs from state to state, ranging from 2.9% to 7.25%, but there are some states that don’t charge any sales tax at all. Sales taxes account for a huge percentage of the country’s tax revenue.

SBA Backed Lender

A lender that provides loans to small businesses. These loans are backed by the SBA and guaranteed for up to 80%. (See “Small Business Association”).

SBA Backed Loan

A loan backed up to 80% by the SBA. (See “Small Business Association”).

Second Trust Loan

Also known as a “piggyback loan,” a second trust loan is an alternative to private mortgage insurance. Typically, second trust loan’s follow the 80/10/10 rule where a mortgage is taken out for 80% of the home’s value, another 10% is the down payment, and the final 10% is financed in a second trust at a higher interest rate. This is a great alternative for those who don’t have 20% to put down on a mortgage, but don’t want to take out private mortgage insurance.

Secured Debt

A secured debt is when the money borrowed is “secured” by the borrower’s funds or assets, and is held by the lender in an interest-bearing account. In other words, the money borrowed is backed by an asset, like a home. This provides security for the lender, so if the borrower stops making payments, the lender can take ownership of the agreed-upon assets.

Secured Line Of Credit

This is a line of credit given to a business by a financial institution, such as a lender. To ensure a greater chance of the lender getting repaid, the lender is able to put a lien on a business’ assets, such as their inventory or a building. This enables the financial institution to seize and liquidate those assets (i.e. take ownership and sell for cash) should the business default on the loan (or stop paying their loan payments).

Settlement

This is where a home buyer, seller and lender meet to legally finalize the transaction. During this meeting the owner of the property is transferred from the seller to the buyer.

Short Sale

If an asset is sold to recover money and this money is lower than the total debt, it is classed as a Short Sale.

Simple interest

This is a type of interest that is paid on the principal amount borrowed and does not compound on itself

Small Business Association

The SBA helps small businesses across the United States, providing a number of services.

Sole Proprietorship

This is a type of business structure in which there is no legal distinction between the owner and the business

Student Loan Forbearance

This is a period of time where you don’t need to pay back your student loans. Examples that would qualify include serving in a medical internship, the amount you owe is at least 20% of your total gross monthly income, you’re serving as an AmeriCorps volunteer, and others.

Student Loan Grace Period

This is the period of time between when a student finishes college and gets a job where they don’t have to pay back their student loans.

Subprime Borrower

A subprime borrower is someone who has an average-to-poor credit score. Typically scores between 580-669 are considered subprime.

Subprime Loan

This is a loan that only people with subprime credit can qualify for. In other words, it is a loan with higher interest rates for people with either low income, a poor credit history, or a high loan-to-value ratio.

Subprime Mortgage

This is a mortgage given to an individual with subprime credit.

T:

Tax Rebates

A partial refunds given to a citizen that has overpaid tax.

Term

This is the time period from the beginning loan date to the date in which the entire balance of the loan is due. This will be specified in legal documents.

Title

This is a document giving an individual ownership to a property

Total Insurance

This is a form of insurance called indemnity insurance, which protects the holder from financial loss accrued from defects in a property’s title.

Total Loan Amount

Calculated as the difference between your home’s value and the down payment, this is the principal amount that was borrowed.

Total Loan Repayment

When you get a mortgage loan, there are different costs associated with it, such as fees and interest. The total loan repayment is the sum of all those costs.

Total Of All Payments (mortgage)

When buying a home, this is the sum of all payments over the life of your mortgage loan, including the money you spend towards interest, principal, property taxes, homeowners insurance, HOA dues, and PMI.

Trade-In Value (car)

If you decide to trade in your vehicle at a dealership for a new car, this is the amount of money you will get back for your car.

U:

Underwater Mortgage

A mortgage is called an underwater mortgage when the value of your home is worth less than the current balance on the mortgage. For example, if your mortgage balance is $234,323 but your home’s value is $132,344, this would be an underwater mortgage.

Unsecured Debt

This is debt not backed up by collateral in case you default (or stop making payments on the loan). Examples of unsecured debt include credit card debt, unpaid medical bills and utility bills, and student loan debt

Upside-Down Loan

This is a loan secured by collateral that has gone down in market value, and is worth less than the balance owed. For example, it would be an upside-down loan if you owe $10,000 on a car that is only worth $8000.

Utility Rebates

Money returned to an individual who has overpaid a utility bill.

V:

VA Funding Fee

Unlike conventional mortgage loans, VA loans don’t require mortgage insurance and tend to have lower interest rates and credit requirements. To help offset this, they require most borrowers to pay a VA funding fee, which is a one-time charge ranging from 1.25% to 3.3% of the loan amount. This can be paid upfront or lumped in together with the mortgage.

VA Loan Limit

This is the maximum amount of money a qualified Veteran can borrow without making a down payment

Variable Rate Mortgage

This is a type of mortgage loan in which the interest rate is not fixed.

Vehicle Appraisal

Using various market factors, including age, vintage, rarity, mileage, and comparable sales, your vehicle’s value is determined

Veteran’s Administration Loan

This is a mortgage loan specifically for veterans and those currently in the military, as well as surviving spouses. These are guaranteed by the Department of Veterans Affairs, and while they don’t issue the loans (these are issued by approved private lenders), they do set the guidelines and rules of the loans.

W:

Walk-Through

After a buyer and seller of a home have reached an agreement for a sale, the walk-through is an opportunity for the buyer to do one last inspection before closing. This is to ensure the property is as expected and that all necessary repairs have been completed.

Working capital

This is the amount of capital, or accumulated wealth of a business, that is available for day-to-day operation. This is a great way to determine the health of a business

Working Capital Ratio

The working capital ratio is determined by dividing a business’s current assets by their current liabilities. This important because it shows whether a company has enough capital to cover its short-term debt. A good working capital ratio is between 1 and 2. A score below 1 implies negative working capital while a score over 2 implies that a company is not properly investing excess assets.