Glossary of Basic Finance Terms You May Come Across
A
Adjustable rate mortgage (or ARM )- A home mortgage in which the rate of interest is adjusted based on a standard rate index. Most ARMs have caps on how much the interest rate may increase.
Amortization schedule - A timetable for the gradual repayment of a mortgage loan. The amortization term is usually expressed in months. A 30-year fixed-rate mortgage, for example, has an amortization term of 360 months.
Annual percentage rate (APR) - A standardized method of calculating the cost of debt, stated as a yearly rate which includes such items as interest, insurance, and certain points or credit fees.
Asset - Something worth money such as cash, stock, land, precious metals, securities, collectors items, accounts receivable, and other property
ATM surcharge - Fee charged for a non-account holder to use bank-owned ATM.
B
Balloon mortgage - A loan with regular monthly payments which amortize over a stated term but call for a final lump sum (balloon payment) at the end, or maturity date.
Blue book – Abbreviation for the Kelley Blue Book, an industry guide that car buyers and sellers use to estimate wholesale and retail vehicle pricing
Book value - Original price at which the consumer purchased an asset.
Bridge loan - A loan that "bridges" the gap between the purchase of a new home and the sale of the borrower's current home. The borrower's current home is used as collateral and the money is used to close on the new home before the current home is sold.
C
Capital gain - Shares of stock or an asset that’s price increased from when you bought it. Can be simply called “profit.”
Capital loss - Shares of stock or an asset that’s price decreased from when you bought it. Can be simply called “loss.”
Certificate of Deposit (CD) - Deposit account at banks with accrued interest that is paid up to 5 years.
Clear title - A title that is free of liens or legal questions as to ownership of a piece of property.
Closing costs - Expenses incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, escrow payments, and charges for title insurance.
Cloud on title - Any fact or condition that could affect the title. Will usually affect the sale of property, most notably, real estate.
Commission - A fee paid to a salesperson or broker for buying or selling an asset or security.
Contract - Form in writing that states and establishes a future option or trade for an asset or security.
Current assets - Assets or securities that can be converted to money within 1 year.
Current liabilities - Liabilities or debts that must be paid within 1 year.
D
Dealer holdback - Usually a 2 to 3 percent of allowance off a manufacturer's suggested retail price, that manufacturers provide to dealers. Therefore, a buyer could obtain a car below invoice price and the dealer would still make a profit
Dealer incentives - Programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer.
Dealer preparation, or dealer prep or preparation charges - An additional charge that dealers try to make car buyers pay. It usually represents pure profit for the dealers, who have already been paid by the manufacturer for the cost of preparing the car for sale.
Debt-to-income ratio A person’s individual measurement that compares the total of money that you make to the total of money that you have to repay to your lenders. For the majority of individuals, this figure starts to make sense when they are attempting to seek out the funds to buy a house because it’s necessary to define mortgage availability.
Default - Failure to pay payments or interest on a current loan, lease, or bond. Not a good thing.
Destination charge - The fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry.
Discount - A price below the actual selling or buying price of a bond. Also known as a premium.
Dividends - A distribution of profits to a companies shareholders.
Down payment - The amount of a property's purchase price that the buyer pays in cash and does not finance with a loan.
E
Equity - The value of a property minus the owner's outstanding loan balance.
Extended warranty or service contract - A contract that covers certain car repairs or problems after the manufacturer's or dealer's warranty expires. Extended warranties are sold by car manufacturers, dealers and independent companies. Usually must be purchased by the end of the first year of ownership.
F
Federal Deposit Insurance Corporation (FDIC) - Federal institution that protects limited bank deposits bank, except mutual funds. Bank deposits are usually insured up to $100,000.
Federal Housing Administration (FHA) - An agency of the U.S. Department of Housing and Urban Development (HUD) that insures residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money.
Fiscal year - 12 month accounting period when a company determines it earnings and profits. Not a calendar year.
Foreclosure - The legal process by which a homeowner in default on a mortgage loses their house. Different than short sales.(See short sale)
Fixed-rate mortgage - A mortgage in which the interest rate does not change during the entire term of the loan, usually 15 years or 30 years.
G
Gap insurance – Insurance that covers the difference between what the car is worth and what you owe on the car. It comes into play if the car is stolen or totaled (damaged to the point that repair would cost more than the car is worth) while you are still making payments.
Garnishment (wage garnishment) - An amount withheld from your pay and given to another party, usually a collections agency employed by a creditor.
H
Hard inquiry - Requests that result from a person applying for credit, such as a mortgage, a car loan, a credit card or a rental application. They are included in the formula for determining a person's credit score. Slightly affects credit score, versus a soft inquiry (see soft inquiry).
I
Income - A capital gain such as a dividend, interest, or other currency gain such as wages or salary.
Interest rate – The cost of credit—the amount charged (expressed in per-year terms) on a loan. The rate varies according to the type of loan and your credit history.
J
Joint account - A bank account owned by two or more persons who share equally in the rights and liabilities of the account.
Joint return - A tax return filed by a married couple using the Married Filing Jointly status that combines the income and deductions of both spouses on the same tax return.
Judgment - A decision from a judge on a civil action or lawsuit; usually an amount of money a person is required to pay to satisfy a debt or as a penalty.
Jumbo mortgage - A home loan that exceeds the limits set by Fannie Mae and Freddie Mac ($359,650 this year). These mortgages will carry a higher interest rate than a smaller, conventional mortgage.
K
Kelley Blue Book - The best-known of the car pricing guides. The company was founded by Les Kelley, a California used-car dealer. The first edition, in 1926, included values for such cars as a 1926 Packard sedan limousine with balloon tires ($3,825), and a 1921 Nash touring car with clock ($50). Today's editions have listings for more than 10,000 cars, vans and trucks, nationwide.
L
Late payment fee -Charge for not making payments on a loan on time.
Lessee - The person who is leasing property; the consumer
Lessor - The person who grants a lease; a car dealer’s financial company or a bank
Line of credit - A loan with a specified maximum amount given during a specified period of time. Usually given by banks and financial institutions to credit worthy customers to overcome liquidity problems.
Loan application fee - A sum charged by a lender for accepting a document in which a prospective borrower details his or her financial situation to qualify for a loan. Only commonplace for bad credit loans usually.
Loan consolidation – The transferring of multiple loans into a single loan, usually done to lower the effective interest rate or lengthen the term of the loan.
Loan origination - An origination fee is charged by the lender to process all the paperwork and time involved in obtaining a mortgage.
Lock or lock-in - Rate programs offered by companies that allow borrowers to lock in the current interest rate on a mortgage for a specified period of time, while also letting them "float" the rate down if market conditions improve before closing.
M
Maturity - The date on which the principal balance of a loan becomes due and payable. Marks the date a balloon mortgage payment is due
Mileage charge - Extra charges the lessee must pay if their car is driven over the allowance, usually 12,000 to 15,000 miles per year.
Minimum payment - The minimum amount a cardholder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the cardholder's ability to pay. Most card issuers require a minimum payment of 2 percent of the outstanding balance.
MSRP - Stands for Manufacturer's Suggested Retail Price. It represents the manufacturer's recommended selling price for a vehicle and each of its options. Can be negotiated down.
N
Net Income – Good stuff; the profit you make after taxes.
Notice of default - A step in the foreclosure process in which the lender formally tells a court that the borrower is in arrear, and the borrower gets a notice.
O
Open-end credit - A line of credit that may be used up to a set limit. Also called a charge account or revolving credit.
Open-end lease - In auto buying terms, under an open-end lease, the lessee must pay any difference between the residual value of the car as stated in the lease and the fair market value of the car, if lower, at the end of the lease. The lessor pays for the appraisal that sets the value.. Because the lessee is taking on the risk of having to come up with this extra payment, the payments are lower than for a closed-end lease.
Origination fee - A fee paid to a lender for processing a loan application.
P
Periodic rate - The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day.
Portfolio - Compiled assets and securities and investor holds.
Pre-approval - A credit card offer with "pre-approved" means that a potential customer has passed a preliminary credit-information screening. Companies frequently flood customers with "pre-approved" junk mail, while an a formal credit check may many times void approval.
Prepaid interest - Interest that a borrower pays before it is due, usually to save taxes.
Prepayment penalty - A lender's charge to the borrower for paying off the loan before the end of the term. Whenever applying for a car or home loan, verify this condition. On paper.
Prime Rate - An interest rate standard charged by banks and lenders.
Principal - An amount invested.
R
Rate lock - A lender guaranteeing a specific interest rate for a specified amount of time.
Real rate of return - The percentage of return on an investment over one year, after adjustments for inflation or deflation
Risk - The chance that an original investment might lose value
S
Second mortgage - A mortgage on property that has a lien position behind the first mortgage. In effect, a second mortgage is “borrowing against the house” to free up equity for other needs.
Secondary mortgage market - The buying and selling of existing mortgages.
Secured credit card - A card is one in which the financial institution issues a card with a maximum that is equal to a deposit that the cardholder puts down. In effect, it’s a prepaid credit card. These cards are a good choice for people trying to establish or rebuild credit.
Short sale - A short sale, in real estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. Lenders commonly do this in today’s market, as they’d rather take a small loss than go through the lengthy and costly foreclosure process in getting some of their money back.
Soft inquiry – A item on a person's credit report that indicates that someone has asked for a copy of his or her report, usually prospective creditors who want to send out an offer such as a pre-approved credit card. Soft inquiries do not affect your credit score.
Sticker price - This shows the base price and manufacturer's installed options with the manufacturer's suggested retail price (MSRP). Can be negotiated down towards the invoice price, or the price the dealer paid for the car.
Subprime mortgage - A mortgage granted to those with a less-than-perfect credit report. Lenders charge a higher interest rate to compensate for potential losses from customers who may run into trouble or default. Many subprime mortgages are in default today.
T
Transfer tax - State or local tax levied when title passes from one owner to another.
Taxpayer ID Number -Your Social Security Number or other Tax Identification Number
Trade-in value - The amount that a dealership will credit you for your old vehicle you provide as partial or full payment for another vehicle. Amount credited is frequently about 5 percent below the wholesale value of the vehicle.
U
Underwriter - A company or person undertaking the responsibility for issuing a mortgage. Not necessarily the “lender.”
Underinsured driver – part of auto insurance policies that covers injuries to you caused by a driver without enough insurance to pay for your medical expenses. Some states include damages to your car in this coverage.
V
VA mortgage - Veterans Administration-backed loan . Requires very low or no down payments and has less stringent requirements for qualification. Members of the U.S. armed forces are eligible for the loans under certain qualifying conditions.
Variable interest rate - Percentage a borrower pays for the use of money, usually expressed as an annual percentage, and which fluctuates in tandem with a rate index.
Vehicle Identification Number, or VIN - A number assigned to the vehicle by the manufacturer. Each number is unique and appears on the vehicle's registration and title.
Verification of employment - Confirmation that a loan applicant is telling the truth about where he or she works and how much he or she makes.
W
Walk-away lease - The most common type of car lease, also known as a closed-end lease. The lessee may return the car at the end of the lease term, pay any end-of-lease costs, such as the disposition fee, and the lease agreement is over. In a closed-end lease, the lender assumes the risk of predicting the value of the vehicle (its residual value) at the end of the lease's term. Closed-end lease payments are somewhat higher than open-end lease payments.
Z
Zero balance - What shows on a credit card customer's bill when the outstanding balance has been paid and no new charges have been incurred during the billing cycle.
Zero-down-payment mortgage - A mortgage in which the buyer does not make a down payment and borrows the entire purchase price. Hard to find nowadays for most borrowers.