Plain-language reference
Financial glossary
The vocabulary lenders, banks, and brokers use — defined in plain English, each linked to the calculators where the term actually matters.
A
- Adjustable-Rate Mortgage (ARM)A mortgage whose interest rate can change after an initial fixed period according to an index, margin, adjustment schedule, and caps.
- AmortizationThe scheduled repayment of a loan through fixed payments that cover interest first and gradually retire the principal.
- APR (Annual Percentage Rate)The yearly cost of borrowing money, including interest and certain fees, expressed as one percentage for comparing loan offers.
- APY (Annual Percentage Yield)The effective annual return on a deposit account once compounding is included — the number that makes savings rates comparable.
- ARM Index and MarginThe published index plus the lender’s fixed margin determines an adjustable mortgage’s fully indexed interest rate.
B
C
- Capital GainThe amount by which proceeds from selling a capital asset exceed its adjusted cost basis, before applicable netting and tax rules.
- Capital GainsProfit from selling an investment for more than you paid; long-term gains get favorable tax rates in the US.
- Certificate of Deposit (CD)A bank deposit that locks your money for a fixed term in exchange for a guaranteed, usually higher, interest rate.
- Closing CostsThe fees paid to finalize a mortgage or refinance — typically 2–6% of the loan — covering origination, appraisal, title, and taxes.
- Coast FIREThe point when existing retirement investments may grow to a future target without additional contributions, given the assumptions used.
- Compound InterestInterest earned on both the original amount and previously earned interest, producing accelerating growth over time.
- Cost BasisThe tax starting value of an asset, generally purchase cost adjusted for reinvestment, improvements, returns of capital, or prior deductions.
- Credit Card Balance TransferMoving debt from one credit card to another, usually for a promotional rate, often in exchange for an upfront percentage fee.
- Credit LimitThe maximum revolving balance an issuer permits on an account and the denominator used to calculate that card’s utilization ratio.
- Credit Score (FICO)A number, typically 300–850, summarizing your borrowing history; it heavily influences the interest rates lenders offer you.
- Credit Utilization RatioThe percentage of revolving credit currently reported as used, calculated both for each account and across all revolving accounts.
D
- DepreciationA decline in an asset’s value over time from age, use, wear, market changes, or obsolescence.
- DiversificationSpreading investments across many assets so no single failure can sink the portfolio — the one reliable free lunch in investing.
- Down PaymentThe upfront cash you pay toward a purchase, reducing the amount financed; 20% down on a home avoids PMI.
- DTI (Debt-to-Income Ratio)Your monthly debt payments divided by gross monthly income — the percentage lenders use to judge how much more you can borrow.
E
- Effective Tax RateTotal estimated tax divided by the chosen income measure, showing an average percentage rather than the rate on the next dollar.
- Emergency FundCash reserved for genuine surprises — job loss, medical bills, urgent repairs — typically sized at 3–6 months of essential expenses.
- Employer MatchMoney your employer adds to your 401(k) when you contribute, typically 50–100% of your contributions up to a salary percentage.
- EscrowAn account your mortgage servicer uses to collect and pay property taxes and insurance as part of your monthly payment.
- Estimated Tax PaymentA periodic payment toward expected federal tax when withholding does not cover income from self-employment, investments, or other sources.
- Exempt EmployeeA worker excluded from overtime pay under the FLSA based on meeting both a minimum salary level and a duties test.
- Expense RatioThe annual percentage of your money a fund charges for management — a cost that compounds against you over decades.
F
- FHA LoanA mortgage insured by the Federal Housing Administration that can allow a lower down payment but charges upfront and annual mortgage insurance.
- FICA TaxUS payroll taxes funding Social Security and Medicare, generally withheld from employee wages and also paid by employers.
- Financial Independence (FIRE)Having enough invested that portfolio withdrawals can cover living expenses indefinitely, making work optional.
- Fixed-Rate LoanA loan whose stated interest rate stays the same for the agreed term, making scheduled principal-and-interest payments predictable.
- Full Retirement Age (FRA)The Social Security claiming age at which a worker receives the unreduced primary retirement benefit under current law.
G
H
- HELOCA revolving line of credit secured by home equity that commonly has a variable rate, a draw period, and a later repayment period.
- Home AppreciationAn increase in a home’s market value over time; it creates potential equity but is uncertain and can reverse.
- Home EquityThe portion of a property’s value owned by the homeowner, calculated as market value minus outstanding mortgage debt.
I
- Index FundA fund that passively tracks a market index like the S&P 500, delivering the market's return at very low cost.
- InflationThe general rise in prices over time, which steadily reduces what each dollar buys — roughly 2–3% per year in the US long term.
- Interest-Rate CapA contract limit on how much an adjustable mortgage rate or payment may change at one adjustment or over the loan’s life.
L
- Lease Money FactorThe financing rate used in a vehicle lease; multiplying it by 2,400 gives a rough APR equivalent for comparison.
- LiquidityHow quickly an asset converts to spendable cash without losing value — cash is fully liquid; home equity is not.
- Loan TermThe scheduled length of a loan; longer terms lower the payment but raise total interest substantially.
- Loan-to-Value Ratio (LTV)The mortgage balance divided by the property value, expressed as a percentage and used in pricing and mortgage-insurance decisions.
- Longevity RiskThe risk of outliving savings or income, which makes claiming age, withdrawal rates, and guaranteed benefits important retirement decisions.
M
- Marginal Tax RateThe tax rate applied to the next dollar of taxable income, not the percentage paid on every dollar earned.
- Minimum PaymentThe smallest payment a credit card issuer accepts each month — designed to keep the account current, not to pay off the debt.
- Mortgage Discount PointAn upfront charge equal to 1% of the mortgage amount, commonly paid in exchange for a lower interest rate.
- Mortgage InsuranceInsurance or a guarantee fee that protects a lender or government program against mortgage default risk and adds to the borrower’s cost.
N
O
- Operating ExpenseA recurring cost of running a business outside the direct cost of producing or purchasing the goods sold.
- Opportunity CostThe value of the best alternative you give up when choosing how to use money, time, or another limited resource.
- Origination FeeAn upfront lender charge for making a loan, usually stated as a percentage and deducted from proceeds or added to the amount borrowed.
- Overtime Pay (FLSA)At least 1.5× the regular hourly rate owed to non-exempt US employees for hours worked beyond 40 in a workweek.
P
- PMI (Private Mortgage Insurance)Insurance protecting the lender when a conventional mortgage down payment is below 20%, paid by the borrower until enough equity builds.
- PrincipalThe original amount borrowed or invested, before interest — the base on which all interest is calculated.
- Profit MarginProfit divided by revenue, expressed as a percentage that shows how much sales the business retains after a defined set of costs.
- Promotional APRA temporary credit-card interest rate offered for a defined period, after which the account’s standard ongoing APR takes effect.
R
- Real Investment ReturnInvestment return after removing inflation, showing the change in purchasing power rather than nominal account value.
- RefinancingReplacing an existing loan with a new one at different terms — usually to lower the rate, the payment, or the payoff time.
- Required Minimum Distribution (RMD)The minimum annual amount an owner generally must withdraw from certain retirement accounts after reaching the applicable starting age.
- RevenueThe money a business earns from selling goods or services before subtracting costs, expenses, taxes, or financing.
- Roth IRAAn individual retirement account funded with after-tax money whose qualified withdrawals — contributions and earnings — are tax-free.
S
- Safe Withdrawal RateThe percentage of a portfolio you can withdraw annually with high odds it lasts through retirement — 4% is the classic benchmark.
- Second MortgageA loan secured by a home that sits behind the first mortgage in repayment priority, including home equity loans and some lines of credit.
- Self-Employment TaxSocial Security and Medicare tax generally calculated on 92.35% of net self-employment profit, coordinated with the wage base when wages also exist.
- Simple InterestInterest calculated only on the principal balance, never on accumulated interest — the method most federal student loans use daily.
- Social Security Retirement BenefitA federal retirement benefit based on covered earnings and claiming age, with a permanent adjustment for early or delayed claiming.
- Standard DeductionA filing-status-based amount that reduces taxable income when it is used instead of itemizing eligible deductions.
- State Income TaxA state or local tax on taxable income whose brackets, deductions, credits, and rates vary by jurisdiction and filing status.
- Statement BalanceThe amount owed when a credit-card billing cycle closes; it commonly differs from the live current balance and may be what gets reported.
T
- Tax CreditAn amount subtracted from calculated tax; refundable credits can also create a refund beyond tax already paid, while nonrefundable credits cannot.
- Tax WithholdingIncome tax an employer sends to tax authorities from each paycheck as a prepayment toward the employee’s annual tax liability.
- Taxable IncomeThe amount left after eligible adjustments and deductions that federal tax brackets are applied to when estimating regular income tax.
- Traditional IRAAn individual retirement account funded with potentially tax-deductible contributions; withdrawals in retirement are taxed as income.
U
- Unsecured LoanA loan not backed by pledged collateral, priced mainly from creditworthiness, income, debt, and the lender’s underwriting rules.
- USDA Guarantee FeeA USDA loan charge that includes an upfront fee and annual fee to support the program’s guarantee to approved lenders.
- USDA LoanA USDA guaranteed mortgage for eligible borrowers buying a primary residence in an eligible rural area, often with 100% financing.
V
- VA Funding FeeA one-time percentage fee on many VA-backed loans that can usually be paid at closing or financed into the loan.
- VA LoanA VA-backed mortgage for eligible borrowers that generally has no monthly mortgage insurance and may include a one-time funding fee.
- Variable Interest RateAn interest rate that can change over time under the loan agreement, which can make payments rise or fall.
- Vehicle Residual ValueThe estimated value of a leased vehicle at the end of its term, used to calculate depreciation within the lease payment.