| Adjustable-rate loans |
After an initial term, the interest rate on an adjustable-rate mortgage
(ARM) loan is re-set periodically. This is to keep the rate in line
with current market interest rates. For example, a 3/1 ARM loan offers
a fixed rate for the first three years, adjusting once a year thereafter.
A 5/1 ARM loan offers a fixed rate for the first five years, adjusting
yearly thereafter. The lender sets the interest rate by adding a margin
to an index rate. Common indexes include |
| Adjustable-rate mortgage (ARM) |
Adjustable rate mortgages are called ARMs for short. The lender changes
the interest rate periodically in accordance with the loan agreement.
For example, the loan agreement may say that the rate on a 1-year ARM
is reset every Sept. 1 after an initial period of three years. The interest
rate is calculated by adding a margin to an index rate. If the margin
is 3 percentage points and the yield on the 1-year bill (assumed to
be the index rate) is 6%, the loan rate is reset to 9%. ARM loans usually
have provisions that limit how much the loan rate can increase at one
resetting and over the term of the loan. |
| After-tax interest rate |
After-tax interest rate is the effective interest rate you pay on a loan if you deduct interest expense. For example, if you have an 8% loan and are in the 25% tax bracket, the after-tax interest rate is 8% multiplied by (1 minus 0.25), or 6.00%. |
| After-tax return |
Your after-tax return is your investment rate of return
net of taxes. Assume you are in the 25% income tax bracket and qualify
for the 15% capital gains rate. If you sell 100 shares for $15 that
you paid $10 for 366 days ago and which earned $100 in dividends, your
after-tax return is based on paying 15% on the $500 in capital gains
and 15% on the $100 in dividends. After taxes, this equals $510. Divided
by your $1,000 investment, your after-tax return is 51.0%. |
| Agency bond |
An agency bond is a bond that is issued by an agency that
is backed, explicitly or implicitly, by the full authority of the U.S.
government. After Treasury bonds, agency bonds are generally the safest
bond categories since there is little chance that the U.S. government
would permit a bond default. Major issuers of agency bonds include Ginnie
Mae, Fannie Mae, Freddie Mac and Sallie Mae. The first three entities
sell bonds in order to improve the liquidity of home mortgage market
in the U.S. Sallie Mae sells bonds to raise money for financing college
student loans. |
| Aggressive investor |
An aggressive investor is an investor who is willing to
accept a higher degree of investment risk in exchange for a chance to
earn a higher rate of return. Investment risk is the volatility of investment
returns. A basic investing principle states that a higher degree of
investment risk is required to earn a potential higher rate of return. |
| Amortization |
Amortization is the gradual reduction of loan principal that occurs
as you make periodic loan payments. Generally, the loan principal is
completely amortized with the final payment. As you pay back the loan,
an increasing amount of each payment is applied to principal and a lesser
amount is applied to interest. Amortization is also a process of spreading
a cost that is incurred upfront over the term of the loan or life of
the asset. |
| Annual percentage rate (APR) |
The real cost that you pay to borrow, stated as a yearly percentage
of the loan amount. This is sometimes called your effective borrowing
cost. For auto and mortgage loans, closing costs and discount points
are added to calculate APR. For example, if you pay $500 in closing
costs to obtain a $10,000 loan, the APR will be higher than the interest
rate since you are effectively borrowing $9,500 but will owe $10,000.
The Truth-in-Lending Act requires the lender to dis the APR to you.
For credit cards, the annual fee is often not included in the APR calculation.
As a result, an APR of a credit card is often its simple interest rate. |
| Annuity |
An annuity is a series of payments. For example, a monthly
payment of $1,000 for the next 120 months is a 10-year monthly annuity.
Annuities are frequently used in retirement planning because of tax
advantages that they offer. Insurance companies sell annuities contracts.
A fixed annuity pays a constant amount. A variable annuity pays a variable
amount that fluctuates with the investment performance of the underlying
investments. Those underlying investments are called subaccounts. |
| Appraisal |
Appraisal is the process of estimating fair market value of an asset.
Appraisals are routinely required for real estate transactions. An appraiser
should be a certified professional. He or she should be an independent
party to the transaction in order to avoid potential conflict of interest.
Real estate appraisers use methods that are common in local practice.
Comparable-sales method is widely used to appraise real estate. |
| Appraisal value |
Appraisal value is the market value of an asset that is
derived from the appraisal process. Depending on the asset, the method
used to appraise the asset will differ. For homes, appraisers often
use a method that includes recent sales data of comparable homes. They
may also use the replacement method, which is the cost to replace the
home at today's prices. |
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| Balloon mortgage loans |
These loans often have interest-only payments. In this case, you don't
amortize any loan principal and the entire loan amount is due at the
end of the loan term. A balloon mortgage allows you to minimize your
monthly payments until you refinance the loan. Another advantage is
that a larger share of your payment may be eligible for the mortgage
interest tax deduction. |
| Basis point |
A basis point is 1/100 of a percentage point. Interest rates and bond
yields are often stated in basis points. For example, if you hear that
commercial banks raised their prime rate on loans by 25 basis points,
it would mean they raised their prime lending by one-quarter of a percentage
point. |
| Billing period |
The number of days that a lender uses to calculate the
interest you owe on a loan or credit card. This is usually 30 days. |
| Biweekly mortgage |
A mortgage loan that requires a payment every two weeks
instead of 12 monthly payments. The loan is amortized faster using a
bi-weekly mortgage and you pay less interest. |
| Break-even point |
When you refinance a mortgage, the decision is profitable
if you are able to pass the break-even point. At the break-even point,
the savings you receive from refinancing equal the costs. A common break-even
analysis is to calculate how long you must live in a home after you
refinance in order to recover the closing costs you paid to refinance.
For investing in stocks and mutual funds, break-even analysis is used
to calculate the minimum sale price that allows the buyer to recover
the transaction costs from buying the shares. For business operations,
a business reaches its break-even point when it generates enough sales
to pay for all its fixed costs. For each additional dollar of sales,
variable costs should be less than a dollar. As a result, each dollar
of sales past the break-even point generates some profit. |
| Budget variances |
Budget variances are the difference in actual and budgeted
income and expenses. If your budgeted expenses exceed your actual expenses,
you have a positive variance. If your actual expenses exceed your budgeted
expenses, you have a negative variance. As long as you rack up positive
variances, you are able to set aside an amount to save. This savings
amount should be about equal to the amount of the variance. Identifying
budget variances is an important step in effective personal budgeting. |
| Budgeting |
Budgeting is a process that starts with creating a plant
to record all cash inflows and outflows. The process continues by adhering
to a budget. Adherence requires discipline to make sure your budgeted
cash outflows equal your budgeted inflows. A final step of the budgeting
process is review of recent performance. Personal budgeting is a similar
process that you put in place to manage your personal finances. |
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| Capital gain |
An increase in the value of an asset, calculated as the asset's sale
price minus its basis. Capital gains are taxed at different rates depending
on how long the asset is held. A long-term capital gain occurs if you
hold the stock or bond for at least one year. A short-term capital gain
occurs if you hold the security for less than a year. Long-term capital
gains are taxed at lower rates than short-term capital gains, which
are taxed as ordinary income |
| Cash inflows |
Cash inflows are dollars (or relevant currency) that you
receive on an investment. Cash inflows are a payback, or source of cash,
on an investment. Cash outflows, o the other hand, are dollars (or relevant
currency) that you spend or invest in order to earn a rate of return.
Cash outflows are uses of cash. The interest rate that equates the cash
inflows and outflows for a project, even one extending many years, is
called the internal rate of return. |
| Cash outflows |
Cash outflows are dollars (or relevant currency) that
you spend or invest in order to earn a rate of return. Cash outflows
are uses of cash. Cash inflows, on the other hand, are dollars (or relevant
currency) that you receive on an investment. Cash inflows are a payback,
or source of cash, on an investment. The interest rate that equates
the cash outflows and inflows for a project, even one extending many
years, is called the internal rate of return. |
| Cash value |
Cash value is a dollar value that is returned to an insurance
policyholder if the policy is canceled. Cash value is also called cash
surrender value (CSV). Cash value is a feature of a permanent life insurance,
including whole, variable, and universal life. Cash value fluctuates
with the investment performance of a life insurance contract. In some
cases, it may be guaranteed. Cash value may be used as a source of borrowing
for the policyholder and is treated as a tax-deferred investment. |
| Certificate of deposit (CD) |
A certificate of deposit (CD) is a time deposit that you
make at a bank. You can also buy a CD from a broker who is selling them
for other deposit-taking institutions. Deposit periods of CDs are generally
between three months and five years. Deposit amounts generally range
from $500 to $100,000. Since the FDIC guarantees up to a limit of $100,000
per depositor per institution, you may wish to avoid investing in multiple
CDs at one institution for amounts over $100,000 . After all, CDs pay
a lower interest rate in exchange for deposit insurance. If you are
going to risk some of your investment, you should be compensated with
a potential higher rate of return that non-insured investments may offer. |
| Cleanup period |
A personal or home-equity line of credit may specify a
cleanup period in the borrowing agreement. A cleanup period requires
the borrower to periodically pay down the credit line to zero in order
to maintain the lending agreement. |
| Closing |
Closing is the final stage of the loan process that requires an exchange
of any funds due the other party and any signatures for recording the
transaction. Closing costs are paid at the closing. |
| Closing costs |
Closing costs are the total expenses that the buyer pays at the time
a real estate transaction is completed. This stage of the transaction
is called "closing." Closing costs include application,
underwriting and loan-origination fees; mortgage points; title search
and insurance; fees for related legal services; and costs to fund an
escrow account. For home mortgage loans, closing costs generally range
between 3 and 6 percent of the home purchase price. |
| Collateral |
Collateral is an asset that is used to secure the repayment of a loan.
Also called security. For example, if a borrower defaults on an auto
loan, the lender has the right to sell the collateral in order to collect
on the loan. The same principle works on most mortgage loans, which
are collateralized by the homes that the loans are used to buy. |
| Comparable-sales method |
The comparable-sales method is a method of using recent
sale prices of similar assets to help calculate an appraisal value of
an asset. This method is frequently used to appraise residential and
commercial real estate. For example, if three homes with similar features
in your neighborhood were recently sold, their sale prices would be
a fairly reliable indicator of how much your home could sell for today.
The timeliness of sales data is also important. For example, in this
case, if the sales occurred a year ago, these data may not be reliable
indicators of the value of your home today. |
| Compounded interest |
Compounded interest is the interest that you earn on a
deposit or investment that uses compounding. Banks and financial institutions
routinely use compounding to pay you a higher interest rate. For example,
a bank may be offering a CD that pays interest at 10%. If the bank does
not compound interest, you will receive 10% of your investment as interest
income at the end of a year. But if the bank compounds interest every
three months, you will earn an interest rate of 10.38%. If the bank
compounds interest monthly, you will earn 10.47%. And if it compounds
daily, you will earn 10.52%. For a $10,000 deposit, this is an extra
$52 in interest that you earn. |
| Compounding |
Compounding adds the interest you earn on an investment
and invests it, plus the original investment, for another period. The
result is that you earn more interest and a higher rate of return. For
example, if you invest $10,000 at 10% for one year with no compounding,
you would receive $1,000 in interest at the end of the year. But if
the bank compounded your interest every three months, you would earn
$250 after the first three months, which is added to the original deposit
of $10,000 and invested for another three months. After three more months,
your $10,250 investment would earn $256.25 in interest. The process
is repeated so that at the end of the year you earn $1,038 in interest.
This is $38 more than if there were no compounding. Compounding is also
determined by the frequency that you roll over the interest. For example,
a bank may offer 10% on a one-year $10,000 CD. If there is no compounding,
you will receive $1,000 in interest at the end of the term. If interest
is compounded every three months, the rate is 10.38%. If compounded
monthly, the rate is 10.47%. If compounded daily, the rate is 10.52%.
For a $10,000 deposit, an extra 52 basis points in the interest rate
is equal to an extra $52 in interest. |
| Compounding frequency |
The frequency that a bank compounds interest on your deposit.
Banks and financial institutions routinely use compounding to pay you
a higher interest rate. For example, a bank may be offering a CD that
pays interest at 10%. If the bank does not compound interest, you will
receive 10 percent of your investment as interest income at the end
of a year. But if the bank compounds interest every three months (quarterly
compounding), you will earn an interest rate of 10.38%. If the bank
compounds interest monthly, you will earn 10.47%. And if it compounds
daily, you will earn 10.52%. For a $10,000 deposit, this is an extra
$52 in interest that you earn. |
| Conforming mortgage loan |
A conforming mortgage loan is a mortgage loan whose amount allows
Freddie Mac and Fannie Mae, two government-sponsored enterprises, to
buy the loan, repackage it as a security and sell it to investors. A
non-conforming loan is one for a larger amount and is often called a
jumbo loan. For 2006, the conforming loan limit for single-family homes
is $417,000. For Alaska and Hawaii, the conforming loan limit is $625,500. |
| Conservative investor |
An investor who is unwilling to accept a higher degree
of investment risk in exchange for a chance to earn a higher rate of
return. Investment risk is the volatility of investment returns. A basic
investing principle states that a higher degree of investment risk is
required to earn a potential higher rate of return. |
| Consolidation loan |
A loan that is used to pay off loans with higher interest
rates. Home equity loans or lines of credit are often used, when available,
as consolidation loans. Some consolidation lenders offer loans with
lower monthly payments or interest rates, but extend the loan term.
This has the effect of boosting significantly your total payments. The
federal Truth-in-Lending Act requires a lender to disclose the total
amount of payments you will make. |
| Convertible mortgage loans |
These are ARM loans that allow you to convert to a fixed-rate loan
at or before a specified time. The conversion privilege lets you start
off with a low variable rate, then lock in when fixed rates drop low
enough. |
| Cost of Funds Index. |
The Eleventh District of the Federal Home Loan Bank Board, which covers
California, Nevada and Arizona, publishes the Cost of Funds Index. For
more information on the index, visit the Web site of the Federal Home
Loan Bank of San Francisco |
| Cost-benefit analysis |
For autos: an analysis that compares the cheaper of a)
borrowing money to buy a car and paying the interest, with b), paying
cash for a car, and losing the opportunity to earn a rate of return
on the savings applied to the purchase. For homes: an analysis that
subtracts the benefits of homeownership from the costs of homeownership
to obtain a net cost. Included in costs are mortgage interest, discount
points, closing costs, property taxes and homeowner's insurance, home
maintenance costs, and any private mortgage insurance (PMI). Included
in benefits are the tax savings on deductions for mortgage interest
(including points) and property taxes, and an increase in equity that
you receive either from repayment of the loan principal or an appreciation
in the value of your home. |
| Counter-offer |
An offer that follows a buyer's initial offer. The initial counter-offer
may come from the seller or buyer. If the seller makes the initial counter-offer,
it is to lower the price to meet the buyer's initial offer. For example,
if a buyer offers $100,000 for a home that is listed at $110,000, the
seller may counter-offer at $105,000. If the buyer makes the first counter-offer,
it is to raise the initial offer to meet the listing price part way.
For example, if a buyer offers $100,000 for a home that is listed at
$110,000 and the seller ignores the offer, the buyer may counter-offer
at $105,000. Once a counter-offer is made, successive offers from either
side are considered counter-offers. After a series of counter-offers,
a mutually acceptable sale price is usually reached. |
| Credit history |
A credit report is a summary of an individual credit history. It shows
loan payment history, late payments, existence of liens or other encumbrances,
debt forgiveness, bankruptcy filings, and number of inquiries by prospective
lenders. |
| Credit history |
A credit report is a summary of an individual credit history.
It shows loan payment history, late payments, existence of liens or
other encumbrances, debt forgiveness, bankruptcy filings, and number
of inquiries by prospective lenders. |
| Credit limit |
Credit limit is the maximum amount a borrower is authorized
to use. Credit limits are used for lines of credit and other forms of
revolving credit such as a credit card. |
| Credit report |
A credit report is a summary of an individual's credit
history. It shows loan payment history, late payments, existence of
liens or other encumbrances, debt forgiveness, bankruptcy filings, and
number of inquiries by prospective lenders. |
| Credit risk |
Often called default risk, this is the chance that the
person or institution you are lending to is unable to repay your debt. |
| Credit score |
A credit bureau calculates your credit score and submits
it to a lender to assist in making a credit decision. The credit bureau
uses software from Fair, Isaac and Co. to calculate the score (as a
result, a credit score is also called a FICO score). Your credit score
is one determinant of a lender's credit decision. The lender also adheres
to loan-approval guidelines that are set by the company itself. Credit
scores do not have information on your age, gender, color, religion,
marital status, and employment. Other factors, such as your employment
history, are also excluded. According to Fair, Isaac and Co., about
one-fifth of scores lay in each of the following ranges: below-620,
620-690, 690-745, 745-780, and 780-above. |
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| Debt ratio |
Lenders use a debt ratio (also called debt-income ratio) to approve
loan applicants. Debt ratio equals combined monthly debt payments divided
by gross monthly income. For example, combined monthly debt payments
of $2,000 divided by gross monthly income of $4,000 equals a debt ratio
of 50%. |
| Default |
When you fail to repay a loan under the terms of the loan agreement,
you trigger a loan default. This allows the lender to take extra steps
to recover the loan. If it is a student loan that on which you are in
default, you are generally ineligible to receive federal financial aid. |
| Delinquent |
A status that suggests to a lender that you are late in
paying your debts. Being delinquent on your debts often means being
more than 30 days late twice or 60 days late once. Being delinquent
often means your account is handed over to a collection agency for collecting
payment. This step not only results in you being called at home for
payment, but also undermines your credit history. |
| D-end credit |
d-end credit is loan or other form of credit that requires
the borrower to repay the loan without the privilege of borrowing any
repaid loan amounts. An amortizing loan is a common form of d-end credit. |
| Dollar-cost averaging |
An investing technique that requires you to set aside
a fixed amount at regular intervals to buy shares of an investment.
It does not matter what the current price is. Since share prices normally
rise and fall, your cost to acquire the investment over time is, on
average, cheaper than attempting to time your purchases. Market and
investment experts recommend the use of dollar-cost averaging. |
| Down payment |
A down payment is the cash you deposit towards the purchase of equipment,
or commercial vehicle. The larger the down payment, the less you are
required to borrow. For equipment loans, a down payment of 20% of the
equipment purchase price is generally required. The value of a trade-in
can be used instead of a down payment when purchasing replacement equipment. |
| Drawdowns |
Draws, or drawdowns, are other names for withdrawals that
you make on a line of credit. With a credit line, you only pay interest
on the amount of your withdrawals, and only for the period that you
have borrowed the money. |
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| Early-redemption fee |
Mutual funds: A fee that may be charged if fund shares
are redeemed in a very short period, often 90 or 180 days. CDs or other
time deposits: A fee that is charged if you redeem the deposit before
its contracted maturity date. |
| Economic cycle |
Economies tend to perform in cycles. Rising output and employment
characterize the growth phase of the cycle. Interest rates tend to creep
up, reflecting strong demand for credit. Eventually, a bottleneck in
production, a fall in demand, or other factors result in a slowdown.
Declining output and higher unemployment characterize the slowdown phase
of the cycle. Interest rates begin to fall, aiming to stimulate demand
for credit. In time, the economy passes through one cycle. Economic
cycles tend to overlap, but not exactly. This allows investors to benefit
from diversification that comes with buying the stocks and bonds of
companies that operate in these different economies. |
| Effective interest rate |
The effective interest rate is your true interest-rate
cost of borrowing stated as an annual rate. It may be shown on an after-tax
basis, adjusting for a mortgage interest deduction. The effective rate
on a mortgage or consumer loan includes fees, points and other charges
that you pay when you the loan. The effective rate also includes
compounded interest. Higher closing costs or more frequent compounding
result in a higher effective interest rate. |
| Emergency fund |
An emergency fund is also called a rainy-day fund. It
is your pool of savings that is parked in a safe and liquid savings
instrument (perhaps even under the mattress) so that you can access
the funds in an emergency. Financial planners recommend that you have
an emergency fund that is equal to between three and six months of your
salary. Major reasons for tapping your emergency fund include losing
a job or incurring large and unexpected medical expenses. |
| Equity |
Real estate: the residual ownership claim on a home's value. Equity
equals the fair market value of a home, less any mortgage debt or other
obligations. Stocks or businesses: an ownership stake in a company.
Shareholders equity is equal to assets minus liabilities. |
| Establishing credit |
Establishing credit is the act of beginning your own credit
history. Establishing credit requires you to apply for a credit card
or other loan, such as an auto, student, or personal loan. To apply
for a credit card for the first time, you may wish to consider a secured
credit card. This kind of card requires that you deposit an amount equal
to how much you are allowed to borrow with the card. Another way of
establishing credit is to obtain a co-signature from a parent or relative
that guarantees the debt. If you lack either of these choices, you should
have a verifiable source of income. Finally, you should avoid becoming
delinquent in your payments. This means paying at least the minimum
amounts due by the due date. |
| Estate |
Your estate is the value of your assets minus allowable
deductions at your death. Good estate planning ensures that the proceeds
of your estate are distributed to your desired beneficiaries. This requires
that you draft a will or trust and update it periodically. Poor estate
planning leads to probate, a lengthier and more expensive process of
determining the distribution of your estate. Probate may also result
in a larger bill for estate taxes. |
| Expected rate of return |
Expected rate of return is the return that you expect
to earn on an investment, stated as a yearly percentage. For example,
a $10 stock that is expected to be worth $10.80 in one year has an expected
rate of return of 8%. |
| Fair Credit Reporting Act (FCRA) |
The Fair Credit Reporting Act is a federal law passed
in 1970 that protects consumers from abusive credit reporting practices.
Among its statutes, the law authorizes you to receive a free copy of
your credit report within 60 days, if denied credit by a lender that
based its decision, in part, on information in your credit report. FCRA
was amended in 1996 with the passage of the Consumer Credit Reporting
Reform Act. |
| Fed funds rate |
The fed funds rate is the interest rate that major U.S.
banks charge each other to borrow money on a short-term basis. Usually,
this is for loan terms of one day (overnight borrowing) to one week.
The Federal Reserve sets a target rate, and adds or drains reserves
to the money supply to reach it. Although the fed funds rate is a short-term
rate, a change in its target level by the Fed sends a strong message
to the bond market of its intent to fight inflation. As a result, long-term
interest rates are also affected by a change in the target rate. |
| Financial goal |
A financial goal is a goal that involves saving and investing
to reach a specific amount by a specific date. For example, a financial
goal may be to save $25,000 for a college education fund for a child
in 15 years, or it may be to save $500,000 for a retirement fund in
25 years. You can achieve your financial goals through a combination
of saving more, saving longer or earning a higher rate of return. |
| First mortgage lien |
When a homeowner takes out a mortgage loan, he generally
borrows from one lender. In exchange for the loan, that lender requires
the homeowner to grant him a first mortgage lien. A first mortgage lien
is the most senior legal claim. In the event the homeowner sells or
defaults on the loan, the first mortgage lienholder is first in line
to be repaid. If a homeowner takes out a home equity loan, he may likely
borrow from a different lender. In exchange for the home equity loan,
that lender requires the homeowner to grant her a second mortgage lien.
A second mortgage lien is junior, or subordinate, to the first mortgage
lien. In other words, the lienholder of the second mortgage is second
in line to be repaid. |
| FSBO |
Pronounced "fis-bo," FSBO stands for "for
sale by owner." FSBO describes a homeowner that sells a home without
the assistance of a real estate broker, agent or other intermediary.
The owner hopes to sell the home at a lower cost since they can avoid
a sales commission, luring potential homebuyers. |
| Future value |
The future value is the amount that your investment grows
to in the future. For example, the future value of $100 invested at
8% at the end of each month is $1,245 after 12 months. The present value,
or value of this future value in today's dollars, depends on the discount
rate. Often, the discount rate used is the same rate as the rate of
return, or 8%. The present value of $1,245 discounted at 8% is $1,153.
If you were to invest $1,153 today at 8%, this would grow to $1,245
in one year. In other words, you can invest $100 a month for the next
12 months or $1,153 today to obtain the same future value. |
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| Gross income |
The IRS defines gross income as all income that is not exempt from
tax. Gross income may be received as money, goods, property or services. |
| Hard inquiries |
Requests by creditors for a copy of your credit report
to assist in making a credit decision. Hard inquiries are tallied on
your credit report. In general, it is considered prudent to avoid applying
for too much credit. Too many applications result in excessive inquiries.
Too many inquiries are often seen as a sign of potential trouble. Lenders
are more willing to overlook a flurry of inquiries that coincide with
your purchase of a big-ticket item, such as a car or home. |
| Hedging |
Hedging is a risk management technique that eliminates
future price uncertainty. To hedge, you pay a price today that reflects
expectations of buyers and sellers for the future price of a commodity,
index, foreign currency or other financial asset. Hedging helps you
to limit your losses but also limits your chances of earning a higher
rate of return. A foreign exchange hedge is a technique of locking in
a future exchange rate today. |
| Home equity debt |
IRS term for mortgage debt incurred for purposes other than buying,
building or improving your home |
| Home equity loan |
A home equity loan is a mortgage loan that is secured by the residual
equity in your home. To calculate equity, subtract mortgage debt from
your home value. Home equity loans allow a homeowner to make repairs
or other home improvements, refinance other debt, or use for general
purposes. Unlike a home-equity line of credit, a home equity loan is
an amortizing loan. |
| Homeowner's insurance |
Also called property insurance, homeowner's insurance protects the
homeowner from weather-related damage, as well as potential liability
from events that occur on the property. Lenders require homeowner's
insurance coverage to protect the collateral that secures their loan.
Some homeowner's insurance policies do not cover catastrophic events
such as tornadoes, hurricanes or floods. These kinds of events generally
require a separate insurance policy. |
| Homeowners Protection Act |
The Homeowners Protection Act of 1998 requires home lenders
to cancel a requirement for private mortgage insurance (PMI) if the
borrower has equity of at least 22% in their home. (This is equal to
a loan-to-value ratio of below 78%.) The law allows the borrower to
request dropping PMI when equity reaches 20% of home value. A current
appraisal may be required to ascertain the home value. For more information,
see the Web site of the U.S. Dept. of Housing and Urban Development
(www.hud.gov.) |
| Housing ratio |
Lenders use housing ratio to approve loan applicants. Housing ratio
equals combined monthly mortgage payment divided by gross monthly income.
For example, a combined monthly mortgage payment of $1,500 divided by
gross monthly income of $4,500 equals a housing ratio of 33%. |
| Income tax bracket |
Income tax bracket is the highest range of taxable incomes
on which you pay income taxes. The Economic Growth and Tax Relief Reconciliation
Act of 2001 cut tax rates for all individual income tax brackets except
the 15% bracket. A sixth tax bracket of 10% was added for the first
$6,000 ($7,550 in 2006) of income for single taxpayers, $10,000 ($10,750
in 2006) for single parents, and $12,000 ($15,100 in 2006) for married
taxpayers. Income tax rates for 2006 are 35%, 33%, 28%, 25%, 15%, and
10%. For 2006, the 25% tax bracket for single taxpayers is for taxable
incomes between $30,650 and $61,850. For married taxpayers filing jointly,
the same tax bracket is for taxable incomes between $61,300 and $123,700.
See the IRS Web site for all 2006 income tax brackets. |
| Index rate |
An index rate is a widely used interest rate that lenders use to set
the interest rate on loans and credit cards. For residential mortgages,
10-year U.S. Treasury securities are often used for 30-year fixed-rate
loans (on average, most homeowners live in their homes for a period
of time r to 10 years than 30 years). For ARM loans, a common index
is the Eleventh District Cost of Funds Index (COFI), published by the
San Francisco-based district office of the Federal Home Loan Bank. For
credit cards, the U.S. commercial prime rate is frequently used as an
index rate. |
| Individual retirement account (IRA |
The two main types of IRAs are regular and Roth IRAs. Regular IRAs
are also called traditional IRAs because they were the first IRAs introduced
back in 1981. Roth IRAs were introduced in 1998. Regular IRAs allow
you to make a tax-deferred yearly contribution of $4,000 in 2006. For
persons who are age 50 or older, a special catch-up provision allows
you to contribute an additional $1,000, or a total of $5,000, for 2006.
This account grows tax-deferred until you begin to take distributions,
which you can do after you turn age 59-1/2. Roth IRAs require you to
pay income taxes in the year that you make the contribution. You also
can contribute $4,000 per year in 2006 ($5,000 if age 50 or older).
Roth IRAs grow tax-deferred, and if you keep the account for at least
five years and are at least 59-1/2, the entire account can be distributed
tax- and penalty-free. |
| Inflation |
Inflation is a general increase in prices that you pay
for goods and services, stated as a yearly rate. If the inflation rate
is 4%, it means that prices increase at a yearly rate of 4%. For example,
the same basket of goods and services that you can buy today at $1,000
will cost you $1,040 next year. Inflation cuts into your purchasing
power even further for longer periods. For example, if you have $100,000
today and inflation grows at 4%, it would be worth $82,193 in five years.
After 10 years, it would be worth $67,556. The major inflation indexes
are updated monthly by the U.S. Department of Labor. The first index
is the wholesale price index. It is also called the producer price index
(PPI). PPI measures inflation that manufacturers and other producers
face. The second index is the consumer price index (CPI). CPI measures
inflation that consumers face for goods and services such as food, fuel,
and housing. Monthly PPI and CPI figures are reported as a percentage
change over the previous month. A series of 12 monthly reports are linked
to determine a yearly inflation rate. |
| Initial offer |
Real estate: the initial price that a potential buyer offers for a
home. Traders and auctioneers generally refer to a buyer's price as
a bid and seller's price as an offer. |
| Interest rate lock |
Also called a rate lock, an interest rate lock is a temporary guarantee
that the interest rate that a lender quotes you will not change. It
protects you from the chance of an increase in your borrowing interest
rate. Lenders may charge you a small fee to give you an interest rate
lock. Although rate locks are usually for 30 days, a lender may be willing
to offer a longer period in exchange for a larger fee |
| Investment risk |
Investment risk is the probability that your investment
will lose value. It is measured by the volatility of investment returns.
If the rate of return of a stock or other security moves up and down
over a wide range, the stock is said to have more investment risk than
one whose returns fluctuate less. For example, a stock you bought for
$10 that fluctuates between $16 and $2 over the next year has more risk
than if its price fluctuates between $12 and $8. You can reduce risk
to a large degree by holding a diversified portfolio of investments. |
| Investment risk |
Investment risk is the probability that your investment
will lose value. It is measured by the volatility of investment returns.
If the rate of return of a stock or other security moves up and down
over a wide range, the stock is said to have more investment risk than
one whose returns fluctuate less. For example, a stock you bought for
$10 that fluctuates between $16 and $2 over the next year has more risk
than if its price fluctuates between $12 and $8. You can reduce risk
to a large degree by holding a diversified portfolio of investments. |
| Itemizing (deductions) |
Itemizing deductions is the process of adding up individual
tax deductions to determine if this total is more than your standard
deduction. Itemizing is used for completing your income tax return. |
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| Judgment |
A judgment is a legal ruling that requires a defendant
to pay a sum of money to the plaintiff as compensation. A judgment may
impose a lien, or legal claim, on the assets of the person or organization
that the judgment has ruled against. One form of a judgment is the garnishment
of wages to pay a creditor. |
| Junior mortgage lien |
A mortgage lien that is subordinate to, or next in line,
a senior mortgage lien. For example, any second or third mortgage liens
on a property are considered to be junior mortgage liens to the first
mortgage lien |
| Laddering |
An investing strategy that allows you to earn interest
on your most-prized savings without sacrificing your access to them.
You invest in term deposits or bonds that have staggered maturities.
For example, this may be 6-month, 1-year, 3-year, and 5-year CDs. As
each deposit matures, you roll over the principal and accrued interest
for a term that coincides with when you need the funds. This allows
you to have the funds available quickly, earn interest, and avoid paying
a penalty for ending a term deposit before maturity. |
| Leveraging |
Leveraging is a process of borrowing at a lower interest
rate and investing the funds at a higher rate of return. Leveraging
is often a risky process. A low borrowing cost, for example, can increase
unexpectedly. Your lender may suddenly expect you to be a greater credit
risk. Also, your investment rate of return can decrease suddenly. |
| Lien |
A lien is a legal claim held by a creditor against an
asset to guarantee or secure repayment of the debt. Mortgage liens are
regularly used in real estate lending as collateral for a loan. |
| Lien |
A lien is a legal claim held by a creditor against an
asset to guarantee or secure repayment of the debt. Mortgage liens are
regularly used in real estate lending as collateral for a loan. |
| Lifetime cap |
A lifetime cap is the limit to how much the interest rate on an adjustable-rate
loan can be increased over the term of the loan |
| Line of credit |
A line of credit is a form of borrowing money called a revolving credit
instrument. With a line of credit, the borrower can draw down only the
amount needed, up to the amount of the credit limit. The borrower only
pays interest on the amount drawn, or disbursed. Like a credit card
(another form of revolving credit), you can continuously draw down from
the credit line up to the amount of the credit limit. |
| Liquidity |
Liquidity is a favorable characteristic of a stock, bond
or other security. It represents the relative ease with which a security
may be sold. The more buyers and sellers there are for a security, the
greater its liquidity. Liquidity is often reflected in the spread of
the price of the security: A narrow spread between bid and ask prices
is a positive sign of liquidity. |
| Listing agreement |
A contract between the home seller and real estate agent
that spells out the basic terms of the listing. These include home sale
price, whether the home will be listed in a multiple listing service,
sales commission, and contract expiration date. |
| Listing price |
The price that a homeowner asks for his home when selling. Listing
price is usually at the high end of a price range that is negotiated
lower by effective bidding from the buyer. |
| Loan closing |
The final stage of the loan process that requires an exchange
of any monies due and any signatures required to record a transaction.
Closing costs are paid at the closing. |
| Loan pay-down |
A loan pay-down is a payment that you make on a loan or
other debt to reduce the amount owed. A loan payoff, in comparison,
is a payment that you make on a loan or other debt to remove the entire
amount owed. |
| Loan payoff |
A loan payoff is a payment that you make on a loan or
other debt to remove the entire amount owed. A loan pay-down, in comparison,
is a payment that you make on a loan or other debt to reduce the amount
owed. |
| Loan-to-value ratio (LTV) |
Homes: Loan-to-value ratio is a key factor in determining how much
of a home you can qualify for. To calculate, divide the mortgage loan
amount by the fair market of the home value. A recent appraisal is generally
required to determine fair market value. If you have existing mortgage
debt or are adding debt, divide the combined mortgage balance by the
home value. For example, a mortgage loan of $150,000 on a home that
is appraised at $200,000 has an LTV of 75%. As a general rule, mortgage
loans that exceed an LTV of 80% require private mortgage insurance |
| London Interbank Offered Rate (LIBOR) |
A deposit or loan rate that is constructed daily from
the average offer rate of major banks in London. LIBOR is widely used
to price money market securities, often as an index. |
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| Margin |
Margin has different meanings for different industries. For mortgage
lending, margin is the amount a lender adds to the base rate of an adjustable-rate
mortgage or other variable-rate loan to set the loan rate. For example,
if a one-year ARM loan has a margin of 300 basis points over the yield
on 1-year Treasury bills and the T-bill yield is 6.5%, the loan rate
is set to 9.5%. For brokerage accounts, margin is the deposit required
by an investor who short-sells a stock (i.e., borrows shares from a
broker and sells the shares, hoping to buy them back at a lower price
and return the borrowed shares.) |
| Marginal benefit |
Marginal benefit is rooted in cost-benefit analysis. It
is the incremental benefit received from consuming one additional unit. |
| Marginal cost |
Marginal cost is rooted in cost-benefit analysis. It is
the incremental cost incurred from consuming one additional unit. |
| Market interest rate |
Market interest rate is the interest rate for bonds with
similar risk characteristics and terms to maturity to those of the bond
you are selling. The market interest rate is useful for indicating the
price of your bond. If the market interest rate is lower than the coupon
rate of your bond, your bond price will be at a premium to its face
value. If the market interest rate is above the coupon rate of your
bond, your bond price will be at a discount to its face value. |
| Maturity |
Loans: Maturity is the end of a loan term when the full
amount of the loan is repaid in full to the lender. Bonds: Maturity
is the date that the face value of the bond is repaid to investors.
If the face value is less than the price the investor paid, the bond
investor earns a capital loss. (This is equivalent to saying the investor
bought the bond at a premium to face value.) The bond investor may have
earned enough in coupon interest to make it a profitable investment,
however. If the face value exceeds the price the investor paid, the
bond investor earns a capital gain. (This is equivalent to saying the
investor bought the bond at a discount to face value.) |
| Medicare |
Medicare is the federal health insurance program for persons
who are eligible to receive Social Security benefits. As a general rule,
you can apply for Medicare when you turn age 65. In some cases, you
may be eligible for Medicare at a younger age. Part A of Medicare is
the hospital insurance (HI) component. Your entire FICA contribution
goes toward Part A. Part B of Medicare is called the medical insurance
component. You purchase Medicare insurance for Part B, which covers
physician and outpatient expenses. |
| Money market account (MMA) |
A money market account is a bank account that invests
in the safest of short-term securities. Opening a money market account
generally requires a larger deposit than a checking account since it
pays a higher interest rate than demand deposits. The FDIC insures money
market accounts for up to $100,000 per institution per depositor. |
| Money market mutual fund |
Mutual funds that invest in the safest of short-term securities
may not keep pace with inflation. These include Treasury bills, commercial
paper (CP), and other short-term debt securities. Mutual funds are responsible
for picking the investments that make up the mutual fund. The F.D.I.C.
does not insure money market mutual funds. |
| Mortgage interest tax deduction |
The mortgage interest tax deduction allows you to deduct the mortgage
interest expense you pay on mortgage and home equity debt, up to certain
limits of debt. The deduction lowers your tax bill by an amount equal
to the amount of interest times your tax rate. To take the mortgage
interest deduction, you must itemize the deduction using Schedule A
of IRS Form 1040. |
| Mortgage interest tax deduction |
The mortgage interest tax deduction allows you to deduct the mortgage
interest expense you pay on mortgage and home equity debt, up to certain
limits of debt. The deduction lowers your tax bill by an amount equal
to the amount of interest times your tax rate. To take the mortgage
interest deduction, you must itemize the deduction using Schedule A
of IRS Form 1040. |
| Multiple listing service (MLS) |
A database of home listings used by a network of real estate agents
or brokers. If your home is listed in an MLS, it usually means that
any broker or agent subscribing to the database is allowed you show
your home to a prospective buyer. |
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| Open-end credit |
Open-end credit is also called revolving credit. It is
a loan or other form of credit that allows the borrower to use as long
as he or she does not exceed a credit limit. This means that the borrower
can pay down the loan and borrow again at will. |
| Opportunity cost |
Opportunity cost is the sacrifice of benefits from the
next-best alternative that you face when you make a financial or economic
decision. For example, say you had $1,000 to invest. You could invest
it in a stock mutual fund that might return 20% or more. If you make
this investment decision, you sacrifice the opportunity to earn a lower
rate of return on an investment that has no risk. This might be a CD
or other fixed-term deposit that had a 6% rate of return. This 6% guaranteed
return would be the opportunity cost of investing in the mutual fund
instead. |
| Opportunity cost |
Opportunity cost is the sacrifice of benefits from the
next-best alternative that you face when you make a financial or economic
decision. For example, say you had $1,000 to invest. You could invest
it in a stock mutual fund that might return 20% or more. If you make
this investment decision, you sacrifice the opportunity to earn a lower
rate of return on an investment that has no risk. This might be a CD
or other fixed-term deposit that had a 6% rate of return. This 6% guaranteed
return would be the opportunity cost of investing in the mutual fund
instead. |
| Origination fee |
A lender may charge an origination fee that is additional
to any mortgage points you pay. Origination fees are the lender's charge
for funding your mortgage with a mortgage broker. The process of funding
your loan is called origination. |
| Overdraft privilege |
Overdraft privilege is a service a bank offers certain
customers to temporarily borrow or borrow more than an authorized credit
limit. In most cases, if the customer makes a sufficient deposit the
same day, the fee for this privilege is waived. If not, the customer
is charged an interest rate for what is essentially a short-term loan. |
| Ownership test |
A requirement by the IRS that you must own a home for at least two
years in order to exclude from taxable income the allowable amount of
capital gains earned on the sale of your home. This two-year period
must occur during the five-year period that ended on the date you sold
the home. |
| P+I |
P+I is an acronym for loan principal and interest that you pay on
an amortizing loan, including mortgage loans. If your mortgage loan
payments include property taxes and homeowner's insurance, the monthly
payment amount is referred to as P+I+T+I. |
| P+I+T+I |
P+I+T+I is an acronym for loan principal, interest, property taxes
and homeowner's insurance |
| Payment cap |
A limit on the amount that the monthly payment can increase. A periodic
cap limits the amount of the increase at each adjustment period. A lifetime
cap limits the amount that the monthly payment can increase during the
term of the loan. A potential peril of payment caps is negative amortization.
In the case of an adjustable-rate mortgage with a payment cap, rising
interest rates may cause the loan payment to be insufficient to cover
even the interest portion of the scheduled payment. In this case, the
unpaid interest may be added to the mortgage loan principal, if the
loan agreement permits. |
| Periodic rate cap |
The periodic interest rate cap is the maximum amount the loan rate
can change on an adjustable-rate mortgage loan on the anniversary date.
ARM loan rates are often reset once a year after an initial period.
A lifetime cap often exists. A lifetime cap limits the maximum loan
rate that can be charged. |
| Personal assets |
Personal assets are those assets that belong to you. In
general, an asset is property that has value. It can be sold or used
up over a period of time. The value of an asset is stated in dollars
(or the appropriate currency). Personal assets include checking and
savings accounts, investments, personal property, real estate, collectibles,
and the value of life insurance policies. In order to place a value
on personal assets, you rely on either market value of appraisal value.
For assets that are liquid (i.e., there are many buyers and sellers
of the asset or a substitute), market value is a reliable indicator.
For assets that are illiquid (such as a collectible), appraisal value
is a more reliable indicator. |
| Personal balance sheet |
A personal balance sheet shows your personal assets and
personal liabilities. A personal balance sheet may be displayed using
a t-account, with assets on the left and liabilities and equity on the
right. Or it may be displayed in a stacked fashion, with assets on top
and equity on bottom. |
| Personal bankruptcy |
A person files for personal bankruptcy if they are unable
to pay their bills. You file for personal bankruptcy under either Chapter
7 or Chapter 13 of the U.S. Bankruptcy Code. Under the terms of a Chapter
7 filing, which is administered by a bankruptcy trustee, you are usually
required to sell your home and car to fulfill any debt obligations.
Unsecured debts are generally forgiven. The other type of personal bankruptcy
filing is a Chapter 13 filing. A Chapter 13 filing consists of a trustee
establishing a debt repayment plan. You are not required to sell your
home or car under a Chapter 13 filing. With personal bankruptcy, you
may have certain debts forgiven. Your bankruptcy filing remains a public
record for seven years. |
| Personal bankruptcy |
A person files for personal bankruptcy if they are unable
to pay their bills. You file for personal bankruptcy under either Chapter
7 or Chapter 13 of the U.S. Bankruptcy Code. Under the terms of a Chapter
7 filing, which is administered by a bankruptcy trustee, you are usually
required to sell your home and car to fulfill any debt obligations.
Unsecured debts are generally forgiven. The other type of personal bankruptcy
filing is a Chapter 13 filing. A Chapter 13 filing consists of a trustee
establishing a debt repayment plan. You are not required to sell your
home or car under a Chapter 13 filing. With personal bankruptcy, you
may have certain debts forgiven. Your bankruptcy filing remains a public
record for seven years. |
| Personal budget |
A planning tool that lays out in simple and concise terms
how much you earn and spend each month. For example, you may decide
to spend $1,000 and save $200 from your monthly after-tax income of
$1,200. You can do a personal budget for the entire household. As part
of the budgeting process, you want to save for several months of emergency,
or rainy day, expenses. These are funds you can live on for three to
six months in the event of an emergency. Part of setting up a personal
budget is using it to compare to your actual spending. If you actually
spend $1,100 a month and save only $100, you either need to discipline
your spending, or adjust your budget to more realistic circumstances. |
| Personal cash flow |
The difference in cash inflows and outflows over a period
of time. Calculating your personal cash flow is an essential part of
personal budgeting. Cash inflows include salary and other sources of
cash-based income. Non-cash compensation is excluded, and you should
deduct any contributions to a retirement account. Cash outflows include
bill payments, including mortgage or rent, living expenses, utilities,
and repayment of debt. Personal cash flow is usually measured over a
monthly period. |
| Personal liabilities |
Personal liabilities are your debts and obligations. The
amount of liability you owe is stated in dollars (or the appropriate
currency). Personal liabilities most commonly consist of loans, including
those you may have cosigned or guaranteed. (Liabilities for which you
are liable in the event of default by the main borrower are called contingent
liabilities.) Major categories of personal liabilities include credit
card debt, installment debt, mortgage and home equity debt, and brokerage
accounts where you have a margin account. |
| Personal line of credit |
A personal line of credit is an unsecured line of credit
that may or may not have a personal guarantee. A personal line of credit
is a form of revolving credit. This means you can borrow an amount up
to but not exceeding a pre-approved credit limit. Unlike a personal
loan, payments are flexible and may consist of interest-only payments. |
| Personal Net Worth |
Your personal net worth is equal to your personal assets minus personal
liabilities. Personal net worth is measured as of a given date (e.g., "Your
personal worth is worth this much as of Dec. 31, 2006."). For example,
if you have $100,000 in personal assets and $75,000 in personal liabilities,
you have $25,000 in personal net worth. Since the value of your assets
fluctuates, your personal net worth will fluctuate. For example, six
months later on June 30, your personal assets may have risen in value
to $110,000. In this case, your personal net worth has also increased
by $10,000 to $35,000. If you are married, consider computing a combined
personal net worth, or splitting the value of jointly owned assets in
two. If you have more assets than liabilities, you have a positive personal
net worth. Personal net worth is also called personal equity. |
| Personal net worth |
Your personal net worth is equal to your personal assets
minus personal liabilities. Personal net worth is measured as of a given
date (e.g., "Your personal worth is worth this much as of Dec.
31, 2006."). For example, if you have $100,000 in personal assets
and $75,000 in personal liabilities, you have $25,000 in personal net
worth. Since the value of your assets fluctuates, your personal net
worth will fluctuate. For example, six months later on June 30, your
personal assets may have risen in value to $110,000. In this case, your
personal net worth has also increased by $10,000 to $35,000. If you
are married, consider computing a combined personal net worth, or splitting
the value of jointly owned assets in two. If you have more assets than
liabilities, you have a positive personal net worth. Personal net worth
is also called personal equity. |
| Points |
Points are also called discount points, mortgage points, loan discount
points, loan origination fees, and maximum loan charges. A point is
equal to 1 percent of the loan amount. For example, one point on a loan
of $150,000 is $1,500. Lenders consider mortgage points as interest
that you pay in advance. As a result, the more points you pay when you the
loan, the lower your interest rate. If you qualify, you may be able
to deduct mortgage points in the year you the loan for tax purposes.
Otherwise, you will have to amortize the points paid over the term of
the loan. |
| Portfolio |
A portfolio is a group or securities or other investments. If you
invest in a diversified portfolio of securities, you can generally reduce
your investment risk. (Investment risk is the volatility of investment
returns of the securities in your portfolio.) A diversified portfolio
lets you to earn a higher rate of return for a given amount of risk
or reduce your risk for a given rate of return. |
| Pre-approval |
There are the first two steps in applying for a mortgage loan. First,
a lender or broker pre-qualifies you. Pre-qualification determines whether
you have the financial resources to match the size of loan you are requesting.
Information is often not verified at this step. It is a preliminary
step to screen your viability as a loan applicant. Pre-approval is the
next step. It requires much more detail. You will need to verify your
income and down payment, for instance. A lender will determine whether
you meet its underwriting guidelines. A pre-approval signifies that
a lender will make you a loan for the amount that you are pre-approved. |
| Prepayment |
A prepayment is an amount that you pay on your mortgage or other loan
that constitutes an additional, unscheduled payment. Prepayments pay
off a loan sooner and reduce total interest expense. |
| Pre-qualification |
There are the first two steps in applying for a mortgage loan. First,
a lender or broker pre-qualifies you. Pre-qualification determines whether
you have the financial resources to match the size of loan you are requesting.
Information is often not verified at this step. It is a preliminary
step to screen your viability as a loan applicant. Pre-approval is the
next step. It requires much more detail. You will need to verify your
income and down payment, for instance. A lender will determine whether
you meet its underwriting guidelines. A pre-approval signifies that
a lender will make you a loan for the amount that you are pre-approved. |
| Pre-qualification |
There are the first two steps in applying for a mortgage
loan. First, a lender or broker pre-qualifies you. Pre-qualification
determines whether you have the financial resources to match the size
of loan you are requesting. Information is often not verified at this
step. It is a preliminary step to screen your viability as a loan applicant.
Pre-approval is the next step. It requires much more detail. You will
need to verify your income and down payment, for instance. A lender
will determine whether you meet its underwriting guidelines. A pre-approval
signifies that a lender will make you a loan for the amount that you
are pre-approved. |
| Present value |
Present value is the value of a future payment, or series
of payments, discounted at the appropriate interest rate to determine
the value in today's dollars. For example, if you were given the choice
of $100 today or a year from now, you would choose to take it now. You
can invest or spend it. If you could invest it at 10%, you would have
$110 a year from today ($110/$100). In other words, the present value
of $110 a year from today is $100 if the discount rate is 10%. The discount
rate should be at least equal to the inflation rate, which has averaged
about 3% a year over the last decade. As a result, $103 a year from
now has a present value of $100 ($103/1.03). |
| Private mortgage insurance (PMI) |
Private mortgage insurance is an insurance policy that a residential
mortgage lender requires of the borrower if the loan-to-value (LTV)
ratio of the home is greater than 80%. Mortgage insurance protects the
lender from the risk that the borrower may default on the loan. Federal
law requires lenders to notify borrowers when the loan-to-value ratio
drops below 80%. Mortgage insurance premiums vary, but generally range
from $1,000 to $5,000 a year for an average priced home |
| Property tax |
Property taxes are also called real estate taxes. These taxes are
paid to the local taxing authority or municipality. The amount you pay
can generally be deducted from your federal income taxes. Property taxes
are often levied as a percentage of your home's assessed value. For
example, if you pay 0.5% in property taxes of the assessed value, a
home assessed at $250,000 would have a yearly property tax bill of $1,250. |
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| Rate of return |
Rate of return is the percentage gain or loss on an investment expressed
as a yearly rate. Rates of return for periods shorter than or longer
than a year are annualized, or converted to a yearly rate. Rates of
return for multiple-year periods can be stated as average or compounded
returns. The most comprehensive way of measuring rate of return is total
return. Total return includes income earned on distributions while you
own the investment, as well as investment income earned on that income. |
| Rate of return |
Rate of return is the percentage gain or loss on an investment
expressed as a yearly rate. Rates of return for periods shorter than
or longer than a year are annualized, or converted to a yearly rate.
Rates of return for multiple-year periods can be stated as average or
compounded returns. The most comprehensive way of measuring rate of
return is total return. Total return includes income earned on distributions
while you own the investment, as well as investment income earned on
that income. |
| Real Estate Settlement Procedures Act (RESPA) |
Real Estate Settlement Procedures Act (RESPA) is a federal consumer-protection
law. It aims to prevent abuses in the loan closing, or settlement, procedures
for residential mortgage loan transactions. RESPA requires the lender
to provide a series of disclosures that begins when the borrower applies
for a loan. RESPA also requires the borrower to notify the borrower
if it transfers the loan-servicing rights to another company. It also
requires the lender to send a yearly statement to the borrower that
summarizes escrow deposits and payments over the past year. |
| Refinancing |
Refinancing is a means of replacing high-interest debt with a loan
that has a lower interest rate. But it can also be done in order to
switch from a fixed to variable rate, or vice versa, or to eliminate
a balloon payment. A cash-out refinancing is one that involves you paying
off your loan and borrowing an additional amount. The entire loan amount
is secured by a mortgage lien on your home. |
| Repayment plan |
A systematic plan you use to repay debt. First, review personal budget
and personal cash flow to see how much you can pay on a periodic basis.
Next, pick a period in which you want to repay the debt. Finally, calculate
a monthly payment. While repaying a debt, you want to avoid increasing
your debts. That will only prolong the time that it takes to repay,
and will discourage you. In other words, a repayment plan also requires
spending discipline. For example, you may aim to repay a $1,000 debt
in 12 months. A debt repayment plan is also helpful in repairing your
credit. |
| Reverse mortgage |
A lump sum payment or annuity that is paid from a lender
or insurance company to the homeowner to supplement or provide income.
The homeowner or his estate repays the mortgage obligation when he sells
or vacates the home, or dies. Reverse mortgages allow seniors to borrow
from the equity in their homes. Reverse mortgages are not considered
taxable income, and do not affect social security or Medicare benefits.
No mortgage interest tax deduction is available |
| Risk-return trade-off |
A basic investing principle that says the higher the potential
rate of return, the higher the investment risk. Academic and industry
studies support this relationship. For example, stocks historically
offer a higher rate of return than bonds. They also have a higher degree
of investment risk. Investment risk is measured by the volatility of
investment returns. |
| Rollover |
A rollover is the process of converting a distribution
you receive from a qualified employer-sponsored retirement plan to a
retirement plan at a new employer or individual retirement account.
Under the rollover terms, you must generally convert the distribution
within 60 days or else you will be liable for income taxes and, possibly,
an early-withdrawal penalty. If you own shares of qualified small business
stock, you may be able to roll over some or all of a capital gain on
its sale if the replacement stock you buy is also qualified small business
stock. Other conditions apply. For more information on Section 1045
rollovers, see IRS Pub. 550. |
| Sales contract |
Legally binding document between buyer and seller of a home that should
address all terms and conditions of the transaction. |
| Savings interest rate |
The savings interest rate is the yearly interest rate
you earn on your savings. It is also used to calculate the opportunity
cost of paying with cash. In contrast, the saving rate is the percentage
of income you save. |
| Savings plan |
A systematic plan you use to save for a specific financial
goal. If you have more than one financial goal, you may wish to set
up a savings plan for each goal. First, review personal budget and personal
cash flow to see how much you can save on a periodic basis. Next, pick
a period in which you want to save the desired amount. Finally, estimate
a realistic rate of return. It's important that you save regularly and
avoid paying income taxes on your earnings, if possible. One way to
do this is to contribute first to tax-advantaged retirement accounts
and college savings plans. |
| Second mortgage lien |
When a homeowner takes out a mortgage loan, he generally
borrows from one lender. In exchange for the loan, that lender requires
the homeowner to grant him a first mortgage lien. A first mortgage lien
is the most senior legal claim. In the event the homeowner sells or
defaults on the loan, the first mortgage lienholder is first in line
to be repaid. If a homeowner takes out a home equity loan, he may likely
borrow from a different lender. In exchange for the home equity loan,
that lender requires the homeowner to grant her a second mortgage lien.
A second mortgage lien is junior, or subordinate, to the first mortgage
lien. In other words, the lienholder of the second mortgage is second
in line to be repaid. |
| Secondary market |
The two markets for a stock or bond are the primary and
secondary markets. The primary market is where the security is originally
priced. This is a process called underwriting. The secondary market
is where the security is traded after the original investor sells. The
secondary market is also called the after-market. In other words, the
secondary market is where previously issued securities are traded. In
at least one respect, the secondary market is the more important of
the two. The existence of a secondary market adds to the attractiveness
of securities sold in the primary market. If there were no secondary
market (or one characterized by few buyers or sellers), investors would
be obligated to hold to maturity any securities bought in the primary
market. |
| Simple interest rate |
The simple interest rate is the interest that you earn
on savings, stated as a yearly percentage. For example, $1,000 invested
at 10% earns $100 in interest in one year. The opposite of simple interest
is compounded interest. This is the interest you earn on interest that
you have reinvested. For example, if you received payments of $25 every
three months and reinvested it for the remaining terms of nine, six
and three months, you would earn an extra $3.80. This is the amount
of compounded interest. Your compounded interest rate, in this case,
is 10.38%. |
| Social Security |
Social Security is the federal retirement income security
program in the U.S. The program is financed through Social Security
taxes that you pay during your working years. If eligible to receive
Social Security, you may start receiving benefits when you reach age
62. The minimum age for receiving full benefits is gradually increasing
to 67 from 65. |
| Soft inquiries |
Requests you make to obtain a copy of your credit report
for periodic review, or by marketing firms to gather a list of potential
card applicants. Soft inquiries are not tallied on your credit report. |
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| T-account |
A t-account illustrates the composition of the balance
sheet of a company or individual. A t-account shows the assets on the
left side, and liabilities and net worth on the right side. Assets minus
liabilities equal net worth. As a result, the total on the left side
equals the total on the right side of the t-account. For example, if
you have $100,000 in assets and $70,000 in liabilities, you have $30,000
in net worth. (For companies, net worth is called shareholders equity.)
Each side of the t-account has $100,000. |
| Tax savings |
Tax savings are the amount you may save in taxes from a tax deduction
or tax credit. Tax savings are also called a tax shield. To calculate
tax savings from a deduction, multiply the amount of the deduction by
your marginal income tax rate. For businesses, tax savings are realized
on such deductible expenses as lease payments, interest on loan payments,
and depreciation expense Example: At a marginal business income tax
rate of 25%, an increase of $2,000 in depreciation expense may save
you $500 in taxes or $10,000 in operating lease payments may save you
$2,500. You may wish to consult a financial or tax adviser. |
| Taxable account |
A taxable account is an account that does not receive
the tax breaks that either a tax-exempt account or tax-deferred account
are eligible to receive. (Both of these accounts are called tax-advantaged
accounts. Tax-advantaged accounts are authorized by the IRS as investment
vehicles to save for your retirement or the retirements of investors.) |
| Tax-advantaged account |
A tax-advantaged account is an investment account with
tax-deferred or tax-exempt features. The Internal Revenue Service authorizes
the use of tax-advantaged accounts. These accounts are used to save
for retirement or college and other educational expenses. Tax-advantaged
accounts are tax-exempt until you take money out of the account. In
some cases, distributions are tax-exempt provided the account holder
meet certain conditions or the money is spent a certain way. In other
cases, the entire amount of distributions is taxable. |
| Tax-deductible |
A tax-deductible expense or contribution reduces your taxable income.
To calculate the worth of a tax deduction, multiply the deduction by
your income tax rate. For example, if you deduct $10,000 in mortgage
interest expense and are in the 25% income-tax bracket, the tax deduction
is worth $2,500. If you deduct $1,000 in contributions to a charity,
the tax deduction is worth $250. |
| Tax-deductible |
A tax-deductible expense or contribution reduces your
taxable income. To calculate the worth of a tax deduction, multiply
the deduction by your income tax rate. For example, if you deduct $10,000
in mortgage interest expense and are in the 25% income-tax bracket,
the tax deduction is worth $2,500. If you deduct $1,000 in contributions
to a charity, the tax deduction is worth $250. |
| Title insurance |
An insurance policy that the borrower buys when closing
a mortgage loan to ensure that the title to the real property that secures
the loan has no "surprises." A title search should show
any legal encumbrances on the parcel used as collateral. But, on occasion,
an unrecorded lien might exist. This would jeopardize the lender's collateral
position. Thus, the lender requires a title insurance policy. |
| Title search |
A review for any liens or other encumbrances that may
be recorded on a parcel of real estate. A title search is a step in
the process of due diligence that a lender does as part of making a
mortgage loan. The lender of a first mortgage expects to have a first
mortgage lien on the property to ensure he gets repaid first in the
event of the sale of the property or a foreclosure. |
| Trade-in value |
A dealer assigns a trade-in value to an auto, boat or
other vehicle that a buyer wishes to exchange for a replacement vehicle.
Trade-in value, also called trade-in allowance, is subtracted from the
purchase price of the vehicle. Trade-in value is often based on the
published book value of the vehicle. As a general rule, a vehicle with
less wear and tear has greater trade-in value. |
| Treasury bill yields |
The yield on the 1-year T-bill, adjusted for a constant-maturity security,
is widely used |
| Treasury bills (T-bills) |
U.S. Treasury bills are short-term debt obligations of the U.S. Treasury.
T-bills are usually issued to mature in three or six months. Prices
for T-bills are stated as a discount to the par value. For example,
a T-bill with a price of 99.65 is selling for 99.65% of its par value.
T-bills are auctioned weekly and used to pay operations of the federal
government. T-bills are considered to be among the safest and most liquid
investments |
| Treasury bonds (Treasuries) |
Treasury bonds are debt obligations of the U.S. government
that have a maturity of more than 10 years. Treasury bonds are also
called T-bonds or Treasuries. Treasury bonds are issued in denominations
of $1,000, and are auctioned every three months by the U.S. Treasury.
(Debt obligations with a maturity of between 1 and 10 years are called
Treasury notes. Shorter-term securities are called Treasury bills.)
Treasury bond prices are stated in thirty-seconds, using a colon to
show the fractional value. Each 1 point equals $10. For example, a Treasury
bond with a price of 98:25 is selling for 98-25/32 of its par value.
Since one point is worth $10 and each 1/32nd is worth 31.25 cents, a
bond price of 98-25/32 is equal to $987.8125. You owe federal income
taxes on interest and capital gains from Treasury bonds, but income
earned on Treasuries is exempt from state income taxes. |
| Truth-in-Lending Act |
The Truth-in-Lending Act (TILA) is a consumer protection law that
requires lenders to disclose all of your loan costs, your true interest
cost as an annual percentage rate, and total payments you will make
over the loan term. |
| Use test |
A requirement by the IRS that you must have lived in a home as your
main home for at least two years in order to exclude from taxable income
the allowable amount of capital gains earned on the sale of your home.
This two-year period must occur during the five-year period that ended
on the date you sold the home. |
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| Yield |
The annual income provided by a fund, share or bond expressed as a
percentage. Yield is normally calculated by dividing the current price
of the asset by the income. For example, the yield on a bond that sells
for $1,000 and has a coupon rate of 8% is 8%. If the bond price rises
to $1,050, the yield falls to 7.62%. If the price drops to $950, the
current yield rises to 8.42%. Redemption yield is the interest rate
that you are getting if you buy a bond at the current price and hold
it until redemption. |
