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Glossary

  • 401k – A savings plan that allows employees to contribute a fixed amount of income to a retirement account and to defer taxes until withdrawal.
  • Accounts Payable – Money owed to suppliers
  • Accounts Receivable – Money that is owed by customers
  • Actuals – The physical commodities underlying a futures contract. Cash commodity, physical asset.
  • Adjustable-rate mortgage (ARM) – A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject rate spike caps.  An example being a 5 year arm where the rate is adjusted after 5 years.  These rates are lower than fixed rates because of less risk to the lender due to the shorter lending period.
  • Amortization – The process of gradually repaying a debt with regularly scheduled payments.
  • Annual Percentage Rate (APR) – The interest rate being charged on a debt, expressed as a yearly rate. Credit cards often have several different APR’s – one for purchases, one for cash advances and one for balance transfers. They also can fluctuate based on the year, time holding that credit card, or lay payments.
  • Balloon Payment – A dangerous kind of loan where the payments don’t pay off the principal in full by the end of the term. When the loan term expires the borrower has to pay a balloon payment for the remaining amount or refinance.
  • Bankruptcy – A proceeding that legally releases a person from repaying a portion or all debts owed. Bankruptcy damages your credit for 7-10 years and should only be considered as a last resort if you cannot repay your debts.
  • Borrower – The individual who is requesting the loan and who will be responsible to pay it back.
  • Credit Score – A numerical evaluation of your credit history used by businesses to quickly understand how risky a borrower you are. Credit scores are calculated using complex mathematical formulas that look at your most current payment history, debts, credit history, inquiries and other factors from your credit report. Credit scores usually range from 300-850, with 680 or higher considered to be “good” credit scores and 720 or higher will generally get the best available rates.
  • Debt – the amount of money that you owe
  • Debt-to-Income Ratio – The percentage of your monthly pre-tax income that is used to pay off debts
  • Equity – The market value of a home minus the unpaid mortgage principal.  The longer you pay your mortgage the more equity you will have in your home.
  • Federal Housing Administration (FHA) – A division of the Department of Housing and Urban Development (HUD) that provides mortgage insurance.  In many cases the FHA has programs for first time homebuyers or low income home buyers.
  • Finance Charge – The extra cost associated with using credit, be it a loan or credit card. Besides interest charges, the finance charge may include other costs such as cash-advance fees or overdraft
  • Fixed Rate – An interest rate for a credit card or loan that remains constant
  • Fixed Rate Mortgage (FRM) – A mortgage with an interest rate that remains constant for the entire duration of the loan. FRM’s have longer terms (15-30 years) and higher interest rates than adjustable rate mortgages but are not at risk for changing interest rates
  • Foreclosure – When a borrower is in default on a loan or mortgage, the creditor can enact a legal process to claim ownership of the collateral property. Foreclosure usually involves a forced sale of the property where the proceeds go toward paying off the debt.
  • Home Equity Loan – An open-ended loan that is backed by the part of a home’s value that the borrower owns outright. This type of loan is used much like a credit card. Home equity lines of credit can be effective ways to borrow large sums of money with a relatively low interest rate.  However I almost never recommend doing so because you can very easily get yourself deeper into debt.  There are other ways to pay off high interest loans without jeopardizing your home equity.
  • Home Equity – The part of a home’s value that the mortgage borrower owns outright. This is the difference between the fair market value of the home and the principal balances of all mortgage loans
  • Interest – The money a borrower pays for the ability to borrow from a lender or creditor. Interest is calculated as a percentage of the money borrowed and is paid over a specified time.
  • Lien – A legal claim against a person’s property, such as a car or a house, as security for a debt
  • Minimum Payment – The minimum amount that a credit card company requires you to pay toward your debt each month.
  • Point – A unit for measuring fees related to a loan; a point equals 1% of a mortgage loan
  • Principal – The amount of money borrowed with a loan or the amount of money owed, excluding interest
  • Private Mortgage Insurance (PMI) – A form of insurance that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Private mortgage insurance usually is required if the down payment is less than 20% of the sale price.  This goes away once you have earned 20% equity in your home
  • Revolving Account – An account where your balance and monthly payment can fluctuate. Most credit cards are revolving accounts.
  • Secured Debt – A loan that requires a piece of property (such as a house or car) to be used as collateral. This collateral provides security for the lender, since the property can be seized and sold if you don’t repay the debt.
  • Tax Deferred – Refers to investment earnings such as interest, dividends or capital gains that accumulate free from taxation until the investor withdraws and takes possession of them
  • Unsecured Debt – A loan on which there is no collateral. Most credit card accounts are unsecured debt.
  • Utilization Ratio – The ratio between the credit limits on your accounts and the outstanding balances. This ratio shows lenders how much of your available credit you are using overall.
  • Variable Rate – A type of adjustable rate loan tied directly to the movement of some other economic index