Finance.
Glossary

The original amount of money borrowed in a loan, before any interest is added. As loan repayments are made, a portion of each payment reduces the outstanding principal while the remainder covers accrued interest. The outstanding principal balance determines how much interest accrues each period.

The percentage of the outstanding principal charged by the lender per period as the cost of borrowing, typically expressed as an annual figure. The nominal interest rate determines how much you pay above the principal. The effective rate depends on how frequently interest compounds.

The true annual cost of borrowing expressed as a percentage, including not just the interest rate but also lender fees, origination charges, and other costs spread over the loan duration. Comparing APRs rather than advertised interest rates gives a more accurate picture of the total cost of different loan offers.

A fixed payment made to a lender on the same date each month, covering both accrued interest and a portion of the principal. The EMI amount stays constant throughout the loan tenure. Early in the loan, most of each EMI covers interest; toward the end, most covers principal.

The process of paying off a debt through regular scheduled payments over time. In an amortizing loan, each payment covers the period's interest plus a portion of the outstanding principal. The principal portion grows with each payment as the interest portion shrinks. An amortization schedule shows this breakdown for every payment of the loan.

An asset pledged by a borrower to secure a loan. If the borrower defaults, the lender can seize and sell the collateral to recover the outstanding balance. Mortgages use the purchased property as collateral; auto loans use the vehicle. Collateralized loans carry lower interest rates than unsecured loans because the lender's risk is reduced.

A large lump-sum payment due at the end of a loan term, after smaller regular payments throughout the loan life. Balloon mortgages have lower monthly payments than standard fully-amortizing mortgages but require the remaining balance — often a large majority of the original loan — to be settled at maturity, typically through refinancing or property sale.

The point at which total costs equal total revenue, producing neither profit nor loss. In personal finance, the break-even for refinancing is when the cumulative monthly savings from the lower interest rate equal the upfront closing costs paid to refinance. Dividing closing costs by the monthly saving gives the break-even month.

A loan secured by real property where the property itself serves as collateral. If the borrower fails to make payments, the lender can foreclose and take ownership. The two most common mortgage terms are 15 and 30 years, with 30-year mortgages offering lower monthly payments but significantly more total interest paid.

The ratio of a loan amount to the appraised value of the collateral property, expressed as a percentage. A $320,000 mortgage on a $400,000 property has an 80% LTV. Higher LTV ratios indicate greater lender risk and typically result in higher interest rates or requirements for private mortgage insurance. Most lenders prefer LTV at or below 80%.

Insurance required by lenders when a borrower puts down less than 20% on a conventional mortgage — that is, when the LTV exceeds 80%. PMI protects the lender, not the borrower, in the event of default. It typically adds 0.2%–1.5% of the loan amount annually. PMI can usually be cancelled once the LTV drops to 80% through paydown or appreciation.

The initial cash payment made at property purchase, representing the portion of the purchase price not financed by the mortgage. A larger down payment reduces the loan amount, lowers the LTV ratio, eliminates PMI requirements (if at least 20%), and typically secures a lower interest rate.

The portion of a property's current market value that the owner actually owns free of debt. Equity = Property Value − Outstanding Mortgage Balance. Equity grows as the mortgage is paid down and as property values appreciate. Home equity can be accessed through a cash-out refinance or a home equity line of credit (HELOC).

A mortgage where the interest rate remains constant for the entire loan term. Monthly payments are stable and predictable, making budgeting straightforward. Fixed rates are generally higher than initial variable rates but protect the borrower against rate increases over the loan life. The right choice when long-term rate stability is valued over initial cost savings.

A mortgage where the interest rate changes periodically based on a benchmark index such as SOFR. Initial rates are typically lower than fixed rates, attracting buyers who plan to sell or refinance before the rate adjusts. After the fixed introductory period (e.g., 5 years for a 5/1 ARM), the rate adjusts annually, potentially increasing monthly payments significantly.

Replacing an existing loan with a new one, typically to obtain a lower interest rate, shorten the term, or extract equity. Refinancing resets the amortization schedule and involves closing costs. The financial benefit depends on the rate reduction, remaining loan life, and how long the borrower intends to stay — a break-even analysis before refinancing is essential.

A revolving credit facility secured by a property's equity, working like a credit card with the home as collateral. The lender sets a credit limit; the borrower draws funds as needed and pays interest only on the amount drawn, not the full limit. HELOCs typically carry variable rates and have draw and repayment phases.

Interest calculated on both the original principal and the accumulated interest from previous periods. Because interest earns further interest, compound growth is exponential rather than linear. A $10,000 investment at 7% compounding annually grows to approximately $38,700 in 20 years — compared to $24,000 with simple interest over the same period.

Interest calculated only on the original principal, never on accumulated interest. Simple interest grows linearly. It is used in some personal loans, bonds, and short-term financial instruments. For long-term investments, compound interest produces dramatically superior outcomes.

How often interest is calculated and added to the balance — daily, monthly, quarterly, or annually. More frequent compounding produces a higher effective annual return for the same stated rate. The difference between annual and daily compounding is small at low rates but grows with both the rate and the time horizon.

A performance metric expressing the gain or loss from an investment relative to its cost: ROI = (Final Value − Initial Cost) ÷ Initial Cost × 100. ROI does not account for the time period — a 100% return over 10 years is far less impressive than 100% in one year. Use annualized ROI for comparing investments held for different durations.

The ratio of the value returned to the capital invested, commonly used in private equity and venture capital. A 3x MOIC means the investment returned three times the original capital deployed. MOIC = 1 + (ROI ÷ 100). Often used alongside IRR to assess both the size and speed of returns.

The discount rate at which the net present value of all cash flows from an investment equals zero — equivalently, the annualized effective return of an investment accounting for the timing of cash flows. IRR is the standard metric for comparing investment opportunities with different holding periods, capital calls, and distribution schedules.

The sum of all future cash flows from an investment discounted to their present value at a required rate of return. A positive NPV means the investment is expected to return more than the required rate; a negative NPV means it returns less. NPV is the foundational concept in discounted cash flow (DCF) analysis used in corporate finance and real estate.

The constant annual growth rate that would produce the same cumulative return over a given period. If an investment grows 50% over 3 years, the annualized return is (1.50)^(1/3) − 1 ≈ 14.5% per year. Essential for comparing investments with different holding periods on a consistent basis.

The percentage of gross monthly income consumed by monthly debt payments including housing, car loans, student loans, and minimum credit card payments. Lenders use DTI to assess whether additional debt is affordable. Most conventional mortgage lenders require DTI below 43%; the ideal for the best rates is below 36%.

A numerical measure of a borrower's creditworthiness, calculated from credit history including payment history, outstanding balances, credit age, account types, and recent applications. In the US, FICO scores range from 300–850. Scores above 740 typically qualify for the best available rates; below 580 makes most credit products difficult or very expensive to obtain.

A complete table showing every scheduled payment of a loan, with each row detailing the portion going to interest, the portion reducing principal, and the remaining balance after that payment. Reviewing an amortization schedule makes clear how much of early payments is interest versus principal, which is why extra early payments have an outsized long-term impact.

The rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money. The US Federal Reserve targets 2% annual inflation. Inflation is why $1 received in the future is worth less than $1 today — the core concept behind discounted cash flow analysis and the time value of money.

The return on an investment after adjusting for inflation. If an investment returns 7% and inflation is 3%, the real return is approximately 4%. The real return measures the actual gain in purchasing power — what matters practically — as opposed to the nominal return which is stated before inflation adjustment.

The profit from selling an asset for more than its purchase price. Short-term capital gains (assets held under 1 year in the US) are taxed as ordinary income. Long-term capital gains (held over 1 year) typically qualify for lower preferential tax rates. Capital gains tax is only triggered upon the sale of the asset, not while it is held.