Financial Glossary: Definitions for Loans, Credit, & Banking Terms

A tax-advantaged retirement savings plan sponsored by employers. Named after the section of the tax code that created it, a 401(k) allows employees to contribute a portion of their wages on a pre-tax basis (traditional) or after-tax basis (Roth). Many employers offer matching contributions (such as 50% or 100% of your contributions up to a certain percentage of your salary), which is essentially free money for your retirement. Funds in a traditional 401(k) grow tax-deferred until withdrawal in retirement, when they're taxed as ordinary income. Early withdrawals before age 59½ typically incur a 10% penalty plus taxes, though exceptions exist for certain hardships. Annual contribution limits are higher than IRAs ($22,500 in 2023, with an additional $7,500 catch-up contribution for those 50+).

A tax-advantaged investment account designed specifically for education expenses. Named after Section 529 of the Internal Revenue Code, these state-sponsored plans offer two main tax benefits: 1) Money grows tax-free, and 2) Withdrawals are tax-free when used for qualified education expenses (tuition, fees, books, supplies, room and board, computers, and student loan repayments up to certain limits). Many states offer additional tax deductions or credits for contributions. Anyone can open a 529 plan for any beneficiary, including yourself, and contribution limits are high (typically over $300,000 per beneficiary, varying by state). If the beneficiary doesn't need the funds, you can change the beneficiary to another family member without tax consequences.

A home loan with an interest rate that changes periodically based on market conditions. ARMs typically start with a lower fixed rate for an initial period (such as 3, 5, 7, or 10 years), then adjust annually. Each ARM is described by its initial fixed period and how often it adjusts, such as a '5/1 ARM' (fixed for 5 years, then adjusts every 1 year). These loans can be beneficial if you plan to move or refinance before the rate adjusts, but they carry the risk of higher payments if interest rates rise.

The yearly cost of a loan expressed as a percentage, including fees and interest charges. The APR provides a more complete picture of the total cost of borrowing than the interest rate alone. For example, if you borrow $10,000 at a 5% interest rate but pay $300 in fees, your APR would be higher than 5% because it includes those fees. Federal law requires lenders to disclose the APR to help you compare loan offers on an equal basis.

The total amount of interest you earn on a deposit account over one year, including the effect of compounding interest. Unlike simple interest, which is calculated only on the principal amount, APY accounts for interest earned on previously accrued interest. For example, a savings account with a 1% interest rate that compounds daily will have a slightly higher APY than 1%. The higher the APY and the more frequently interest compounds, the more your money grows over time.

The process of paying off a loan through regular payments over time, with each payment going toward both principal and interest. In the early years of an amortized loan (like a mortgage), a larger portion of each payment goes toward interest, while in later years, more goes toward reducing the principal. An amortization schedule shows exactly how each payment is split between principal and interest over the life of the loan, allowing you to see how your balance decreases over time until the loan is fully paid off.

A detailed table showing the breakdown of each loan payment over the life of the loan. It illustrates how much of each payment goes toward the principal balance and how much goes toward interest, as well as the remaining loan balance after each payment. In the early years of a loan, a larger portion of each payment typically goes toward interest, while in later years, more goes toward principal. This schedule helps borrowers understand how their loan will be paid off over time and how much interest they'll pay in total. Reviewing your amortization schedule can help you decide if making extra payments toward principal would be beneficial for reducing your total interest costs.

A yearly charge that some credit card issuers and financial institutions charge for the privilege of having their card or account. Annual fees typically range from $25 to $500+ depending on the card's benefits and rewards program. Premium credit cards with extensive travel benefits, high rewards rates, or exclusive perks often carry higher annual fees. Many basic credit cards don't charge annual fees at all. When evaluating a card with an annual fee, consider whether the benefits, rewards, and perks you'll actually use outweigh the cost of the fee. Some issuers waive the first year's annual fee as an introductory offer or waive it in subsequent years if you spend a certain amount.

While often used interchangeably, APR (Annual Percentage Rate) and interest rate are different measurements of borrowing costs. The interest rate is the basic cost of borrowing money, expressed as a percentage of the loan amount. It's the percentage of the principal that the lender charges you to borrow their money. The APR, however, is a broader measure that includes both the interest rate AND additional costs like origination fees, closing costs, and other charges associated with the loan. For example, a mortgage might have a 4% interest rate but a 4.25% APR when all costs are factored in. The APR gives you a more complete picture of the total cost of borrowing and is required by law to be disclosed to borrowers. When comparing loans, the APR is generally a better tool for understanding the true cost, though you should also consider the interest rate if you're concerned about monthly payment amounts.

A financial transaction where you move debt from one credit card to another, typically to take advantage of a lower interest rate. Many credit cards offer promotional balance transfer rates (often 0%) for a limited time (usually 12-21 months). This can be a smart strategy to save on interest while paying down debt. For example, transferring a $5,000 balance from a card with 18% APR to a card with 0% APR for 15 months could save you over $1,000 in interest if you pay it off during the promotional period. However, most balance transfers incur a fee (typically 3-5% of the transferred amount), which should be factored into your savings calculations. Additionally, if you don't pay off the transferred balance before the promotional period ends, the remaining balance will be subject to the card's regular APR, which could be high.

A large, one-time payment required at the end of a loan term. Balloon loans typically feature lower monthly payments during the loan term, followed by this substantial final payment that "balloons" much larger than the regular payments. For example, you might make small monthly payments for 5 years, then owe the remaining balance as one large payment. These loans can be risky if you can't make the balloon payment when it comes due, potentially forcing refinancing or even foreclosure.

A legal process that helps people or businesses who can't repay their debts get a fresh financial start. The two most common types for individuals are Chapter 7 (liquidation, where non-exempt assets are sold to pay creditors) and Chapter 13 (reorganization, where you create a 3-5 year repayment plan). Bankruptcy can stop foreclosure, wage garnishment, and debt collection activities, but it severely damages your credit score (staying on your credit report for 7-10 years) and doesn't eliminate all types of debt, such as most student loans and tax obligations.

A short-term loan that provides immediate cash flow while waiting for longer-term financing. Often used in real estate when buying a new home before selling your current one. For example, if you find your dream home but haven't sold your current house, a bridge loan can help you make a down payment on the new property. These loans typically have higher interest rates and fees than traditional mortgages and must be repaid within 6-12 months, either when your existing home sells or when you secure permanent financing.

The profit earned when you sell an asset (like stocks, bonds, or real estate) for more than you paid for it. If you hold the asset for more than a year before selling, it's considered a long-term capital gain and typically taxed at lower rates (0%, 15%, or 20% depending on your income) than ordinary income. Short-term capital gains (assets held for a year or less) are taxed at your regular income tax rate. Understanding capital gains is important for investment and tax planning strategies.

A service offered by credit card companies that allows you to withdraw cash or obtain funds using your credit card, essentially borrowing cash against your credit limit. Unlike regular credit card purchases, cash advances typically have no grace period, meaning interest begins accruing immediately from the day you take the advance. They also usually come with a higher interest rate than regular purchases (often 24-27% APR) and a transaction fee (typically 3-5% of the amount advanced, with a minimum fee of $5-$10). Common forms of cash advances include ATM withdrawals using your credit card, cash advance checks from your credit card issuer, or certain transactions that credit card companies treat as cash-like (such as buying lottery tickets, casino chips, or cryptocurrency). Because of their high costs, cash advances should generally be used only as a last resort in genuine emergencies.

A charge imposed by credit card issuers when you use your credit card to obtain cash or cash-equivalent transactions. This fee is typically calculated as a percentage of the advance amount (usually 3-5%) with a minimum fee (often $5-$10), whichever is greater. For example, if you withdraw $500 from an ATM using your credit card with a 5% cash advance fee, you'll pay $25 for the transaction. Cash advance fees are charged in addition to the high interest rates that begin accruing immediately on cash advances. These fees apply to various transactions including ATM withdrawals, cash advance checks, wire transfers, lottery tickets, casino chips, cryptocurrency purchases, and money orders purchased with your credit card. Due to the combination of fees and high interest rates, cash advances are one of the most expensive ways to borrow money and should generally be avoided except in genuine emergencies.

A time deposit account offered by banks that pays a fixed interest rate for a specified term (typically ranging from 3 months to 5 years). CDs generally offer higher interest rates than regular savings accounts in exchange for leaving your money untouched for the entire term. If you withdraw funds before the CD matures, you'll typically pay an early withdrawal penalty, often several months' worth of interest. CDs are FDIC-insured up to $250,000 and are considered low-risk investments, making them good options for short to medium-term savings goals.

Fees and expenses paid at the closing of a real estate transaction, beyond the property's purchase price. These typically range from 2-5% of the loan amount and may include lender charges (origination fees, application fees), third-party fees (appraisal, title search, home inspection), prepaid expenses (property taxes, homeowners insurance), and other costs. Buyers receive a Loan Estimate within three days of applying for a mortgage and a Closing Disclosure three days before closing that itemizes all closing costs, helping avoid surprises at the closing table.

An asset that a borrower pledges to a lender to secure a loan. If the borrower defaults (fails to repay the loan as agreed), the lender can seize the collateral to recover some or all of the loan amount. Common examples include your home for a mortgage, your car for an auto loan, or investments for a securities-backed loan. Loans with collateral (secured loans) typically offer lower interest rates than unsecured loans because they present less risk to the lender.

Interest calculated on both the initial principal and the accumulated interest from previous periods. This is different from simple interest, which is calculated only on the principal. Compound interest works in your favor with savings and investments (earning "interest on interest") but against you with debt. For example, $10,000 invested at 5% compounded annually would grow to $12,763 after 5 years, compared to $12,500 with simple interest. The frequency of compounding (daily, monthly, quarterly, annually) affects how quickly your money grows or your debt increases.

A mortgage loan that is not insured or guaranteed by a government agency like the FHA, VA, or USDA. Conventional loans typically require higher credit scores (usually 620+) and larger down payments (often 3-20%) than government-backed loans. They fall into two categories: conforming loans (which meet the guidelines set by Fannie Mae and Freddie Mac, including loan limits) and non-conforming loans (such as jumbo loans that exceed these limits). Conventional loans often offer competitive interest rates and fewer upfront fees for borrowers with strong credit and financial profiles.

A specialized loan designed specifically to help people establish or improve their credit history. Unlike traditional loans where you receive money upfront, with a credit builder loan, the lender deposits the loan amount (typically $300-$1,000) into a locked savings account or certificate of deposit (CD). You make fixed monthly payments over a set term (usually 6-24 months), and only receive the money after you've paid off the loan completely. The lender reports your payment history to the credit bureaus, helping you build a positive credit record. These loans are particularly useful for people with no credit history or those rebuilding after credit problems. They're offered by credit unions, community banks, and online lenders, often with minimal qualification requirements. While they typically charge interest (though usually at reasonable rates), the primary purpose is credit improvement rather than borrowing funds.

A payment card issued by a financial institution that allows the cardholder to borrow funds to pay for goods and services. Credit cards provide a revolving line of credit with a pre-set spending limit, allowing you to make purchases up to that limit. You can either pay the balance in full each month to avoid interest charges or make a minimum payment and carry the remaining balance forward (revolving), though interest will be charged on the unpaid portion. Credit cards offer various features including grace periods (typically 21-25 days) during which no interest is charged on new purchases if you paid your previous balance in full, rewards programs (cash back, points, or miles), consumer protections (fraud protection, purchase protection, extended warranties), and convenience for online shopping and travel. However, they also typically charge high interest rates (often 15-25% APR), various fees (annual fees, late payment fees, foreign transaction fees), and can lead to debt problems if not managed responsibly.

A company that collects and maintains consumer credit information, then sells it to lenders, creditors, and consumers in the form of credit reports. The three major credit bureaus in the US are Equifax, Experian, and TransUnion. These companies gather data about your credit accounts, payment history, public records (like bankruptcies), and inquiries from lenders who've checked your credit. Each bureau may have slightly different information about you, which is why your credit score can vary between bureaus. You're entitled to one free credit report from each bureau annually through AnnualCreditReport.com.

A service provided by non-profit organizations that offers education and assistance to consumers struggling with debt or financial management. Credit counselors provide personalized advice on budgeting, money management, and debt repayment strategies. They can review your financial situation, help create a budget, and suggest options for addressing debt problems. One common service is a Debt Management Plan (DMP), where the counseling agency negotiates with creditors on your behalf to potentially secure lower interest rates or waived fees, and you make a single monthly payment to the agency, which then distributes payments to your creditors. Legitimate credit counseling agencies are typically non-profit organizations and offer services for free or at low cost. They should be certified and accredited by organizations like the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Credit counseling can be a helpful alternative to more drastic measures like bankruptcy, but it's important to distinguish reputable counselors from for-profit debt settlement companies that may charge high fees and potentially damage your credit.

A record created when someone checks your credit report. There are two types: hard inquiries and soft inquiries. Hard inquiries occur when a lender checks your credit as part of a loan or credit application process. These require your permission, appear on your credit report, and can temporarily lower your credit score by a few points (typically for 12 months). Multiple hard inquiries for the same type of loan (like a mortgage or auto loan) within a short period (usually 14-45 days) are typically counted as a single inquiry for scoring purposes. Examples include applying for a credit card, mortgage, auto loan, or personal loan. Soft inquiries, on the other hand, don't affect your credit score and aren't visible to lenders reviewing your credit report (though you can see them when you check your own report). These include checking your own credit, pre-approved credit offers, background checks by employers, and existing creditors reviewing your account. Understanding the difference is important for managing your credit score, particularly when shopping for loans or credit cards.

A numerical rating that represents a person's creditworthiness based on their credit history. In the US, FICO scores range from 300 to 850, with higher scores indicating better credit. Your score is calculated based on five main factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Lenders use this score to determine whether to approve you for loans and credit cards, and what interest rates to offer you. Generally, scores above 670 are considered good, above 740 very good, and above 800 excellent.

The percentage of your available credit that you're currently using. It's calculated by dividing your total credit card balances by your total credit limits and multiplying by 100. For example, if you have $2,000 in credit card debt across cards with a combined limit of $10,000, your credit utilization ratio is 20%. This ratio is the second most important factor in your credit score calculation (after payment history), accounting for about 30% of your score. Lower utilization ratios are better for your credit score, with financial experts typically recommending keeping it below 30%. However, people with the highest credit scores often maintain utilization below 10%. Credit utilization is calculated both overall (across all your cards) and per card, so having one maxed-out card can hurt your score even if your overall ratio is low. Strategies to improve your ratio include paying down balances, making multiple payments per month, requesting credit limit increases, and keeping old accounts open even if you don't use them regularly.

The process of combining multiple debts into a single loan or credit line, usually to secure a lower interest rate, lower monthly payment, or simplified repayment schedule. For example, if you have several high-interest credit cards, you might take out a personal loan at a lower rate to pay them all off, leaving you with just one monthly payment. This strategy can save money on interest and help you pay off debt faster, but it requires discipline to avoid accumulating new debt on the paid-off accounts. Common consolidation methods include personal loans, home equity loans, balance transfer credit cards, and debt management plans.

A range of strategies and programs designed to reduce or eliminate consumer debt when standard repayment becomes difficult or impossible. Debt relief options exist on a spectrum from less to more severe, each with different impacts on your credit and financial situation. These include: 1) Debt consolidation - combining multiple debts into a single loan with a lower interest rate; 2) Debt management plans - working with a credit counseling agency to create a structured repayment plan, often with reduced interest rates; 3) Debt settlement - negotiating with creditors to accept less than the full amount owed as payment in full (typically damages credit significantly); 4) Bankruptcy - a legal process that either discharges many debts (Chapter 7) or creates a court-approved repayment plan (Chapter 13). Each option has specific eligibility requirements, costs, and consequences for your credit score and financial future. Legitimate debt relief services should explain all options, including potential negative consequences, and shouldn't charge large upfront fees before providing services. Be wary of companies promising to eliminate your debt quickly without consequences, as debt relief scams are common.

The percentage of your monthly gross income that goes toward paying debts. Lenders use this ratio to assess your ability to manage monthly payments and repay debts. To calculate your DTI, divide your total monthly debt payments (mortgage/rent, car loans, student loans, credit card minimums, etc.) by your monthly gross income, then multiply by 100. For example, if you pay $2,000 in monthly debt payments and earn $6,000 per month, your DTI is 33%. Most mortgage lenders prefer a DTI of 43% or less, though some loan programs allow higher ratios. A lower DTI improves your chances of loan approval and better interest rates.

A risk management strategy that involves spreading investments across various financial instruments, industries, and categories to reduce exposure to any single asset or risk. The principle is similar to "not putting all your eggs in one basket." For example, instead of investing all your money in one company's stock, you might invest in a mix of stocks, bonds, real estate, and cash across different sectors and geographic regions. Diversification can't guarantee against loss, but it can help reduce the impact of volatility and market fluctuations on your overall portfolio.

An initial upfront payment made when purchasing an expensive item or service, such as a home or car. The down payment is usually expressed as a percentage of the total purchase price. For homes, down payments typically range from 3-20% of the purchase price, with 20% often allowing you to avoid private mortgage insurance (PMI). Larger down payments generally result in lower monthly payments, better interest rates, and less total interest paid over the life of the loan. Government-backed loans like FHA, VA, and USDA offer options with lower down payment requirements for qualified borrowers.

Also known as a prepayment penalty, this is a charge imposed by some lenders when a borrower pays off all or part of their loan before the scheduled term ends. These fees are designed to compensate lenders for the interest income they lose when loans are paid off early. Early repayment fees can be structured in different ways: as a percentage of the remaining loan balance (typically 1-4%), a certain number of months' interest payments, or a flat fee. They're most commonly found on mortgages, auto loans, personal loans, and business loans, though many lenders now offer loans without these penalties. The fee amount and conditions typically decrease the longer you've had the loan. For example, a mortgage might have a 2% penalty if paid off in the first year, 1% in the second year, and no penalty thereafter. Federal regulations limit prepayment penalties on many types of mortgage loans, and some states have additional restrictions. When shopping for loans, it's important to ask about prepayment penalties and consider whether the flexibility to pay off your loan early without penalty is important to you.

A deposit made by a buyer to show serious intent to purchase a property. This good-faith deposit, typically 1-3% of the home's purchase price, is part of the negotiation process and demonstrates commitment to the seller. The funds are usually held in an escrow account and later applied toward your down payment or closing costs at settlement. If the deal falls through due to contingencies outlined in your contract (like a home inspection or financing issues), you typically get your earnest money back. However, if you back out for reasons not covered by contingencies, you might forfeit this deposit.

The difference between the market value of an asset (such as a home) and the amount owed on it. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Home equity increases as you pay down your mortgage and/or as your property value rises. You can access this equity through home equity loans, home equity lines of credit (HELOCs), or cash-out refinancing. In investing, equity refers to stock or ownership shares in a company, representing a claim on part of the company's assets and earnings.

A financial arrangement where a third party holds and regulates payment of funds or assets on behalf of two other parties in a transaction. In real estate, an escrow account serves two main purposes: 1) During home buying, it holds your earnest money deposit until closing; 2) After purchase, many mortgage lenders establish an escrow account to collect and pay your property taxes and homeowners insurance. With the latter, a portion of your monthly mortgage payment goes into this account, ensuring these important expenses are paid on time. This helps both you and the lender by preventing tax liens or lapses in insurance coverage.

A government-backed mortgage designed to help homebuyers with lower credit scores and smaller down payments. FHA loans are insured by the Federal Housing Administration, reducing risk for lenders and allowing them to offer more favorable terms. Key features include down payments as low as 3.5% (with a credit score of 580+), lower credit score requirements (potentially as low as 500 with a 10% down payment), and more flexible debt-to-income ratios. However, FHA loans require mortgage insurance premiums (MIP) – both an upfront premium and annual premiums – regardless of down payment size, which increases the overall cost compared to conventional loans.

A loan with an interest rate that remains the same throughout the entire term of the loan, resulting in consistent monthly payments. This predictability makes budgeting easier since your principal and interest payment never changes (though taxes and insurance might if included in your payment). Fixed-rate mortgages are commonly available in 15, 20, and 30-year terms, with longer terms offering lower monthly payments but higher total interest costs. These loans provide protection against rising interest rates, making them popular during periods of low rates or economic uncertainty.

A temporary postponement or reduction of loan payments granted by a lender during times of financial hardship. Unlike loan forgiveness, forbearance doesn't erase what you owe – it just provides temporary relief. During forbearance, interest typically continues to accrue, and you'll need to repay the missed amounts later, either in a lump sum, through a repayment plan, or by adding them to the end of your loan term. Mortgage forbearance became widely used during the COVID-19 pandemic, allowing homeowners to pause payments without penalties. To request forbearance, contact your loan servicer and be prepared to explain your financial hardship.

A set period of time after a payment due date during which a borrower can make a payment without incurring a late fee or having the payment reported as late to credit bureaus. For credit cards, grace periods typically last 21-25 days between the end of a billing cycle and the payment due date, during which no interest is charged on new purchases if you paid your previous balance in full. For mortgages and other loans, grace periods are usually 10-15 days after the due date. While payments made during the grace period aren't technically late, it's best to pay by the actual due date to avoid cutting it too close.

A person who agrees to pay a borrower's debt if they fail to meet their payment obligations. Unlike a co-signer, who is equally responsible for the debt from the beginning, a guarantor only becomes responsible if the primary borrower defaults. Guarantors are commonly used when the primary borrower has insufficient income, limited credit history, or poor credit. For example, a parent might serve as a guarantor on their adult child's first apartment lease or loan. Landlords and lenders evaluate a guarantor's credit history, income, and assets just as thoroughly as they would a primary applicant's. Being a guarantor is a significant financial responsibility that can affect your debt-to-income ratio and potentially your ability to qualify for your own loans. If the primary borrower defaults and you can't fulfill the obligation, your credit score will suffer, and you may face collections or legal action. Before agreeing to be a guarantor, carefully consider your relationship with the borrower, your own financial situation, and whether you could comfortably cover the payments if necessary.

A revolving line of credit that uses your home as collateral, allowing you to borrow against your home equity as needed. Similar to a credit card, you can borrow up to your credit limit, repay, and borrow again during the draw period (typically 10 years). HELOCs usually have variable interest rates based on the prime rate plus a margin. After the draw period ends, you enter the repayment period (typically 20 years) when you can no longer borrow and must repay the outstanding balance. HELOCs offer flexibility for ongoing expenses like home improvements or education costs, but they put your home at risk if you can't make payments.

A tax-advantaged investment account designed to help you save for retirement. The two main types are Traditional IRAs and Roth IRAs. With a Traditional IRA, contributions may be tax-deductible, reducing your current taxable income, but withdrawals in retirement are taxed as ordinary income. With a Roth IRA, contributions are made with after-tax dollars (no immediate tax benefit), but qualified withdrawals in retirement are completely tax-free. Both have annual contribution limits ($6,500 in 2023, with an additional $1,000 catch-up contribution for those 50+) and specific rules about when you can withdraw funds without penalties.

A fixed payment made at regular intervals over a specified period to repay a loan. Each installment typically includes both principal (the original amount borrowed) and interest (the cost of borrowing). For example, a 30-year mortgage with monthly payments has 360 installments, while a 5-year auto loan has 60 monthly installments. The amount of each installment is calculated to ensure the loan is fully paid off by the end of the term. With amortizing loans like mortgages and auto loans, early installments contain more interest and less principal, while later installments contain more principal and less interest. This payment structure provides predictability for budgeting purposes, as the installment amount typically remains the same throughout the loan term (unless you have an adjustable-rate loan). Installment loans differ from revolving credit (like credit cards) in that they have a fixed repayment schedule and a definite end date.

The percentage of a loan amount that a lender charges for the use of their money. Interest rates can be fixed (staying the same for the entire loan term) or variable (changing based on market conditions). For example, a $10,000 loan with a 5% annual interest rate would cost $500 in interest for one year if no principal is repaid. Interest rates are influenced by factors including the Federal Reserve's policies, inflation, economic conditions, your credit score, and the loan type. Even small differences in interest rates can significantly impact the total cost of a loan, especially for long-term loans like mortgages.

A promotional interest rate offered by credit card issuers for a limited time period, typically ranging from 6 to 21 months after account opening. These introductory rates are often significantly lower than the card's standard rate—frequently 0% APR—and can apply to purchases, balance transfers, or both. For example, a card might offer "0% intro APR on purchases for 15 months," meaning you won't pay any interest on new purchases during that period. Intro APR offers are particularly valuable for making large purchases you need time to pay off or for transferring high-interest debt from other cards (though balance transfers usually incur a fee of 3-5% of the transferred amount). It's important to understand exactly when the intro period begins and ends, as any remaining balance will be subject to the much higher standard APR once the promotional period expires. Additionally, late payments may cause you to lose the intro rate prematurely. To maximize these offers, create a plan to pay off the balance before the intro period ends, and continue making at least minimum payments on time throughout the promotional period.

A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA), making it ineligible for purchase by Fannie Mae or Freddie Mac. In most U.S. counties, the 2023 conforming loan limit is $726,200 for single-family homes, though it's higher in expensive housing markets. Because jumbo loans represent more risk to lenders and can't be sold to government-sponsored enterprises, they typically require excellent credit scores (often 700+), larger down payments (10-20% or more), significant cash reserves, and lower debt-to-income ratios. Interest rates may be higher or lower than conforming loans, depending on market conditions.

A legal claim or right against a property that serves as security for a debt or obligation. If the debt isn't paid, the lienholder may have the right to take possession of the property or force its sale to recover the amount owed. Common types include mortgage liens (securing home loans), tax liens (for unpaid property or income taxes), judgment liens (from court rulings), and mechanic's liens (for unpaid construction work). Liens appear in title searches and must typically be cleared before a property can be sold with a clear title. Some liens, like property tax liens, take priority over others regardless of when they were filed.

A sum of money borrowed from a lender (such as a bank, credit union, or online lender) that must be repaid, typically with interest. Loans come in many forms, each designed for specific purposes and with different terms. The main categories include: 1) Secured loans, which are backed by collateral (like mortgages or auto loans) and typically offer lower interest rates; 2) Unsecured loans, which don't require collateral (like most personal loans) but usually have higher interest rates; 3) Revolving loans, which provide a credit line you can borrow from repeatedly (like credit cards); and 4) Installment loans, which provide a lump sum that's repaid in fixed payments over a set term (like student loans). Key loan features to understand include the interest rate (fixed or variable), annual percentage rate (APR), loan term, monthly payment amount, total cost over the life of the loan, and any fees (origination fees, prepayment penalties, late fees). Your credit score, income, debt-to-income ratio, and the loan's purpose significantly impact the loan terms you'll be offered.

The period of time over which a loan is scheduled to be repaid. Common loan terms include 15 or 30 years for mortgages and 3-7 years for auto loans. Shorter terms typically come with higher monthly payments but lower total interest costs, while longer terms offer lower monthly payments but higher overall interest. For example, a $300,000 mortgage at 4% interest would cost about $1,432 monthly for a 30-year term (total interest: $215,609) versus $2,219 monthly for a 15-year term (total interest: $99,425). Choosing the right loan term involves balancing monthly affordability with long-term financial goals.

A percentage that expresses the relationship between the loan amount and the appraised value or purchase price of the asset being financed. To calculate LTV, divide the loan amount by the property value and multiply by 100. For example, if you borrow $180,000 to buy a $200,000 home, your LTV is 90%. Lenders use LTV to assess lending risk—higher LTVs represent greater risk. For conventional mortgages, an LTV above 80% typically requires private mortgage insurance (PMI). Lower LTVs often qualify for better interest rates and loan terms. As you pay down your loan or if your property value increases, your LTV decreases.

The smallest amount a borrower must pay on a debt each month to keep the account in good standing and avoid late fees or penalties. For credit cards, this is typically calculated as a small percentage (often 1-3%) of your balance plus interest and fees, or a fixed minimum amount (like $25), whichever is greater. For example, on a $1,000 balance with a 2% minimum payment requirement, you'd need to pay at least $20. While making only minimum payments keeps your account current, it's an expensive strategy that can lead to long-term debt. For instance, paying only the minimum on a $5,000 credit card balance at 18% APR could take over 30 years to pay off and cost more than $12,000 in interest. For installment loans like mortgages or auto loans, the minimum payment is the scheduled monthly payment that includes both principal and interest, calculated to pay off the loan by the end of its term. To reduce debt efficiently, financial experts recommend paying more than the minimum whenever possible, focusing extra payments on high-interest debt first.

A loan used to purchase or refinance real estate (typically a house or condo) where the property itself serves as collateral. If the borrower fails to repay the loan, the lender can foreclose on the property. Mortgages typically have longer terms than other loans—commonly 15 or 30 years—and consist of four main components: principal (the amount borrowed), interest (the cost of borrowing), taxes (property taxes collected and paid by the lender), and insurance (homeowners insurance and possibly mortgage insurance). These components are often referred to as PITI. The interest rate can be fixed (remaining the same throughout the loan) or adjustable (changing periodically based on market conditions). Key factors affecting mortgage terms include your credit score, down payment size, debt-to-income ratio, and the property's value. Common types include conventional loans (not government-backed), FHA loans (insured by the Federal Housing Administration, offering lower down payments), VA loans (for military members and veterans), and jumbo loans (exceeding conforming loan limits).

Insurance that protects the lender if a borrower defaults on their mortgage. There are two main types: Private Mortgage Insurance (PMI) for conventional loans with less than 20% down payment, and Mortgage Insurance Premium (MIP) for FHA loans. PMI can be canceled once you reach 20% equity (by law, lenders must automatically terminate it at 22% equity), while MIP on most FHA loans is required for the entire loan term if your down payment was less than 10%. Mortgage insurance increases your monthly payment—typically costing 0.5-1.5% of the loan amount annually—but enables borrowers to purchase homes with smaller down payments.

An investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Professional fund managers make investment decisions aligned with the fund's stated objectives (growth, income, balanced, etc.). Mutual funds offer small investors access to diversified, professionally managed portfolios that would be difficult to create individually. They're priced once daily at the net asset value (NAV), which is calculated after market close. Funds charge annual expense ratios (typically 0.5-1.5% for actively managed funds) and sometimes sales loads (commissions). Index funds, a type of mutual fund that tracks market indexes, typically have lower expenses than actively managed funds.

A charge imposed by lenders for processing a new loan application, typically calculated as a percentage of the total loan amount (usually 0.5% to 1% for mortgages and 1% to 8% for personal loans). For example, a 1% origination fee on a $300,000 mortgage would cost $3,000. This fee compensates the lender for services like processing your application, underwriting the loan (verifying your financial information), and preparing loan documents. Origination fees are typically paid at closing for mortgages or deducted from the loan proceeds for personal loans. Some lenders offer "no-origination-fee" loans, but these often come with slightly higher interest rates to offset the lost fee income. When comparing loan offers, it's important to consider the origination fee as part of the total cost of borrowing, which is reflected in the loan's Annual Percentage Rate (APR). In some cases, origination fees may be negotiable, especially for borrowers with excellent credit or those bringing substantial business to the lender.

A situation that occurs when you spend or withdraw more money from your checking account than you have available, resulting in a negative balance. Banks may handle overdrafts in several ways: 1) Overdraft protection transfers funds from a linked savings account or credit line; 2) Overdraft coverage pays the transaction but charges a fee (typically $30-$35 per item); 3) Return/decline the transaction, which may result in a non-sufficient funds (NSF) fee and potential merchant fees. Many banks offer overdraft protection programs, but these services can be expensive if used frequently. You can avoid overdrafts by monitoring your balance, setting up low-balance alerts, and opting out of overdraft coverage for debit card transactions.

Upfront fees paid to the lender at closing to reduce the interest rate on your loan. One point equals 1% of the loan amount (e.g., $3,000 on a $300,000 mortgage). Buying points is essentially prepaying interest to "buy down" your rate, typically reducing it by about 0.25% per point. Whether points make financial sense depends on how long you'll keep the loan—the longer you stay in the home without refinancing, the more likely you'll recoup the upfront cost through lower monthly payments. The break-even point (when savings equal the cost of points) is calculated by dividing the cost of points by the monthly payment savings.

A preliminary evaluation by a lender that indicates how much you might be able to borrow for a home purchase. Unlike pre-qualification (which is based on self-reported information), pre-approval involves a formal application, credit check, and documentation review. The lender verifies your income, assets, debts, and credit history to determine your loan eligibility, potential interest rate, and maximum loan amount. A pre-approval letter typically remains valid for 60-90 days and strengthens your position when making offers, showing sellers you're a serious buyer who can likely secure financing. However, pre-approval doesn't guarantee final loan approval, which comes after property appraisal and further underwriting.

An informal, preliminary assessment of how much you might be able to borrow based on basic financial information you provide to a lender. Unlike pre-approval, pre-qualification typically doesn't involve verification of your information or a detailed credit check. Instead, you self-report details about your income, assets, debts, and estimated credit score, and the lender gives you a general estimate of what you might qualify for. This process is quick, often taking just minutes to complete online or over the phone, and doesn't impact your credit score since it usually involves only a soft credit inquiry, if any. Pre-qualification is useful as a first step in the home buying or loan shopping process, giving you a general idea of your price range. However, since the information isn't verified, sellers and real estate agents don't give pre-qualification letters the same weight as pre-approval letters. Think of pre-qualification as a rough estimate, while pre-approval is a more reliable indicator of your actual borrowing power.

The original amount of money borrowed in a loan, or the amount still owed, not including interest or other charges. For example, if you take out a $250,000 mortgage, that's your initial principal. As you make payments over time, part of each payment reduces the principal, while the rest covers interest. With amortizing loans like mortgages, early payments go mostly toward interest, with a smaller portion reducing principal. As the loan progresses, this ratio shifts, with more of each payment going toward principal. Making extra principal payments can significantly reduce your loan term and total interest paid.

Insurance required by lenders on conventional mortgage loans when the down payment is less than 20% of the home's purchase price. PMI protects the lender—not you—if you default on your loan. The cost typically ranges from 0.3% to 1.5% of the original loan amount annually, depending on your down payment size, credit score, and loan term. PMI is usually added to your monthly mortgage payment. By law, lenders must automatically cancel PMI when your loan balance reaches 78% of the original purchase price. You can request cancellation when you reach 80% LTV. Avoiding or removing PMI can save thousands of dollars over the life of your loan.

The process of replacing an existing loan with a new loan, typically to secure better terms such as a lower interest rate, lower monthly payments, or a different loan term. When you refinance, the new loan pays off the old one, and you begin making payments on the new loan. Common reasons to refinance include taking advantage of lower interest rates, switching from an adjustable to a fixed rate, shortening the loan term to build equity faster, or accessing home equity through cash-out refinancing. Refinancing involves closing costs (typically 2-5% of the loan amount), so it's important to calculate your break-even point to ensure the benefits outweigh the costs.

The length of time over which a borrower agrees to repay a loan in full, according to the loan agreement. This period determines how many payments you'll make and significantly impacts both your monthly payment amount and the total interest you'll pay over the life of the loan. Common repayment terms include 15 or 30 years for mortgages, 3-7 years for auto loans, 5-20 years for student loans, and 2-7 years for personal loans. Shorter repayment terms typically result in higher monthly payments but lower total interest costs, while longer terms offer lower monthly payments but higher overall interest costs. For example, a $20,000 personal loan at 7% interest would cost about $396 monthly for a 5-year term (total interest: $3,761) versus $254 monthly for a 10-year term (total interest: $10,476). Some loans offer flexible repayment terms, such as graduated payment plans or income-driven repayment for federal student loans. When choosing a repayment term, consider both your current budget constraints and the long-term cost of borrowing.

A type of credit that allows you to repeatedly borrow up to a set limit, repay, and borrow again without having to reapply. Unlike installment loans (which provide a lump sum that's repaid over a fixed term), revolving credit provides ongoing access to funds with flexible repayment amounts. The most common examples are credit cards and home equity lines of credit (HELOCs). With revolving credit, you're assigned a credit limit, and you can use any amount up to that limit. As you repay what you've borrowed, that credit becomes available again. You're only charged interest on the amount you use, not your entire credit limit. Minimum payments typically fluctuate based on your current balance. Revolving credit accounts remain open indefinitely unless closed by you or the lender. While revolving credit offers flexibility, it also requires discipline, as the open-ended nature and variable payments can make it easier to accumulate debt. Your credit utilization ratio (the percentage of available revolving credit you're using) significantly impacts your credit score, with lower utilization generally resulting in higher scores.

A type of Individual Retirement Account where contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free, including all earnings and growth. Unlike Traditional IRAs, Roth IRAs don't provide an immediate tax deduction, but they offer significant tax advantages in retirement. Key features include: 1) Tax-free growth and qualified withdrawals; 2) No required minimum distributions (RMDs) during your lifetime; 3) Ability to withdraw contributions (but not earnings) at any time without penalties; 4) Income limits that restrict high earners from direct contributions. Roth IRAs are particularly beneficial if you expect to be in a higher tax bracket in retirement or want tax flexibility in your later years.

A type of credit card designed for people with limited or damaged credit that requires a security deposit as collateral. The deposit, which typically ranges from $200 to $2,000, usually determines your credit limit. For example, a $500 deposit generally gives you a $500 credit limit. This deposit reduces the lender's risk, making these cards accessible to those who might not qualify for traditional unsecured credit cards. Secured cards function just like regular credit cards—you make purchases, receive monthly statements, and make payments. Most importantly, they report to the major credit bureaus, helping you build or rebuild your credit history with responsible use. The security deposit is refundable when you close the account in good standing or when the card issuer upgrades you to an unsecured card (which many do automatically after 6-12 months of responsible use). While secured cards often have higher interest rates and may charge annual fees, they're valuable stepping stones to better credit products. When shopping for a secured card, look for one with no or low annual fees, a clear path to upgrading to an unsecured card, and reporting to all three major credit bureaus.

A loan that is backed by collateral, such as a home or car. If the borrower defaults, the lender can seize the collateral to recover the loan amount. Common examples include mortgages (secured by your home), auto loans (secured by your vehicle), and secured credit cards (secured by a cash deposit). Because the lender has recourse to specific assets if you don't repay, secured loans typically offer lower interest rates than unsecured loans. However, they also carry the risk of losing the collateral if you can't make payments. The loan amount is usually tied to the value of the collateral, with lenders offering a percentage of the asset's value.

A government-backed loan designed to help small businesses access financing when they might not qualify for conventional business loans. The SBA doesn't lend money directly; instead, it guarantees a portion of loans made by participating lenders, reducing their risk. Popular programs include: 1) 7(a) loans (the most common, for general business purposes, up to $5 million); 2) 504 loans (for major fixed assets like real estate or equipment); 3) Microloans (smaller amounts up to $50,000); and 4) Disaster loans. SBA loans typically offer longer terms, lower down payments, and more flexible requirements than conventional business loans, though the application process can be lengthy and documentation-intensive.

A type of loan offered to borrowers with poor or limited credit histories who don't qualify for conventional loans. These loans are characterized by higher interest rates, larger fees, and less favorable terms to compensate lenders for the increased risk of lending to borrowers with lower credit scores (typically below 620). Subprime loans exist across various credit products, including mortgages, auto loans, personal loans, and credit cards. For example, while a borrower with excellent credit might qualify for a mortgage at 4% interest, a subprime borrower might pay 7-10% for the same loan amount. While these loans provide access to credit for those who might otherwise be denied, they come with significant drawbacks, including much higher lifetime costs and an increased risk of default. The 2008 financial crisis was partially triggered by widespread defaults on subprime mortgages. If you're offered a subprime loan, consider whether you can improve your credit score first to qualify for better terms, or look into credit builder products specifically designed to help improve your credit profile.

An expense that reduces your taxable income, lowering the amount of tax you owe. Unlike tax credits (which directly reduce your tax bill dollar-for-dollar), deductions reduce the income on which your taxes are calculated. For example, if you're in the 22% tax bracket, a $1,000 deduction saves you $220 in taxes. Common deductions include mortgage interest, state and local taxes (up to $10,000), charitable contributions, and certain medical expenses. You can either take the standard deduction ($13,850 for single filers in 2023) or itemize deductions if their total exceeds the standard deduction. Tax deductions are an important consideration in financial planning, especially for homeowners and those with significant charitable giving.

The length of time over which a financial agreement is in effect. For loans, the term is the period during which you must repay the borrowed amount, such as 30 years for a typical mortgage or 5 years for a car loan. Shorter loan terms generally mean higher monthly payments but less total interest paid, while longer terms offer lower monthly payments but higher overall interest costs. For investments like certificates of deposit (CDs), the term is the period during which your money must remain deposited to earn the promised interest rate and avoid early withdrawal penalties. For insurance policies, the term is the duration of coverage, such as 20 years for a term life insurance policy. In credit cards, "terms and conditions" refer to the rules governing the account, including interest rates, fees, and payment requirements. Understanding the term of any financial product is crucial for planning, as it affects both your monthly budget and the total cost or benefit over time.

A type of life insurance that provides coverage for a specific period (the "term"), such as 10, 20, or 30 years. If you die during the term, the policy pays a death benefit to your beneficiaries. If you outlive the term, the coverage ends with no value. Term life is typically much less expensive than permanent life insurance (like whole or universal life), making it an affordable way to provide financial protection during your working years or while raising children. Premiums usually stay level throughout the initial term, after which they increase significantly if you want to renew. Many term policies offer a conversion option, allowing you to convert to permanent insurance without a medical exam.

Insurance that protects homebuyers and mortgage lenders against problems with the property title, such as ownership disputes, liens, or errors in public records. There are two types: 1) Lender's title insurance (required by most mortgage lenders, protecting only the lender's interest); and 2) Owner's title insurance (optional but recommended, protecting your equity). Unlike most insurance that protects against future events, title insurance primarily covers past issues that weren't discovered during the title search. It's typically paid as a one-time premium at closing and remains in effect for as long as you or your heirs own the property. The cost varies by location and property value, usually ranging from 0.5% to 1% of the home's purchase price.

A loan that is not backed by collateral. Approval for unsecured loans is based primarily on the borrower's creditworthiness and income. Common examples include most personal loans, student loans, and credit cards. Because there's no collateral for the lender to claim if you default, unsecured loans typically have higher interest rates than secured loans and may have stricter approval requirements. Lenders evaluate your credit score, income, employment history, and debt-to-income ratio to determine eligibility, loan amount, and interest rate. While unsecured loans don't put specific assets at risk, defaulting can still result in collection actions, lawsuits, wage garnishment, and severe damage to your credit score.

A loan with an interest rate that can change over time based on changes in a reference rate, such as the prime rate. Monthly payments can increase or decrease as the interest rate changes. Common examples include adjustable-rate mortgages (ARMs), variable-rate credit cards, and some personal loans and student loans. Variable rates typically start lower than fixed rates, making initial payments more affordable. However, they carry the risk of higher payments if interest rates rise. Most variable-rate loans specify how often the rate can adjust, how much it can change each time, and the maximum rate over the life of the loan. These loans may be advantageous in falling-rate environments or for borrowers who don't plan to hold the loan long-term.

The process of earning ownership rights to employer-provided benefits over time. Most commonly associated with retirement plans and stock options, vesting schedules determine when you gain full ownership of these benefits. For example, a 401(k) match might vest 20% per year over five years (graded vesting) or 100% after three years (cliff vesting). Until fully vested, you risk forfeiting unvested portions if you leave the company. Vesting encourages employee retention while protecting employers who invest in their workforce. Once benefits are vested, they remain yours even if you leave the company. Understanding your vesting schedule is crucial when considering job changes or planning your financial future.

A tax document that employers must provide to employees and the IRS annually, showing wages earned and taxes withheld during the previous year. The W-2 includes your total earnings, federal and state income taxes withheld, Social Security and Medicare taxes, and contributions to retirement plans or other benefits. You need this form to file your annual tax return, and you should receive it by January 31 for the previous tax year. If you work multiple jobs, you'll receive a W-2 from each employer. Self-employed individuals and independent contractors don't receive W-2s; instead, they typically receive 1099 forms reporting their income without tax withholding.

The income return on an investment, expressed as a percentage of the investment's cost or current market value. For bonds, yield can be calculated in several ways: current yield (annual interest payment divided by current price), yield to maturity (total return if held until maturity), or yield to call (return if called early). For stocks, dividend yield represents the annual dividend payment divided by the current share price. Yield is different from total return, which includes both income (interest or dividends) and capital appreciation or depreciation. Higher yields often come with higher risk, so it's important to consider both yield and the investment's overall risk profile when making investment decisions.

A budgeting method where income minus expenses equals zero, meaning every dollar of income is assigned a specific purpose. Unlike traditional budgeting that adjusts previous budgets, zero-based budgeting starts from scratch each period, requiring you to justify all expenses. To create a zero-based budget: 1) List your monthly income; 2) List all expenses, including savings and debt payments; 3) Subtract expenses from income; 4) Adjust categories until the difference is zero. This approach helps eliminate wasteful spending, prioritize financial goals, and ensure every dollar works toward your objectives. While more time-intensive than other budgeting methods, it provides complete visibility into your finances and often leads to better financial outcomes.