Loan Terms Glossary

A mortgage with an interest rate that changes periodically after an initial fixed period. A 5/1 ARM is fixed for 5 years, then adjusts annually. Rate changes are tied to a benchmark index (SOFR) plus a margin, and are capped by periodic and lifetime limits.

The gradual repayment of a loan through scheduled payments that cover both interest and principal. In early payments, most goes to interest; over time the principal portion grows. A fully amortized loan is paid off exactly at maturity.

The true annual cost of a loan including interest plus required fees (origination, points, mortgage insurance), expressed as a yearly rate. APR is always ≥ the stated interest rate. Federal law (TILA) requires lenders to disclose APR before signing.

A licensed appraiser's professional estimate of a property's market value. Lenders require an appraisal before funding a mortgage to ensure the collateral supports the loan amount. If the appraised value comes in below the purchase price, it can derail a transaction or require renegotiation.

Business financing secured by assets such as accounts receivable, inventory, or equipment. The borrowing base fluctuates with the value of pledged assets. Common for manufacturers and distributors.

Moving existing credit card debt to a new card, typically to take advantage of a 0% intro APR promotional period. Transfer fees of 3–5% usually apply. The goal is to pay off the balance before the promo rate expires.

A large lump-sum payment due at the end of a loan term. Common in some commercial mortgages and short-term loans — the loan has lower monthly payments calculated on a long amortization but the full remaining balance is due at the balloon date.

One one-hundredth of a percentage point. 100 basis points = 1%. Lenders and the Federal Reserve use basis points to describe small rate changes precisely. A rate increase from 6.00% to 6.25% is a 25 basis point increase.

Making half your monthly mortgage payment every two weeks instead of one full payment per month. Since there are 26 bi-weekly periods per year (not 24), you make the equivalent of 13 monthly payments per year, paying off a 30-year mortgage roughly 4–6 years early.

A tax provision allowing businesses to deduct a percentage of qualifying asset costs in the first year of service, beyond Section 179. In 2024: 60% first-year deduction; 40% in 2025; 20% in 2026; 0% in 2027.

Limits on how much an adjustable-rate mortgage's interest rate can change. There are three types: initial cap (max change at first adjustment), periodic cap (max change at each subsequent adjustment), and lifetime cap (max total change over the life of the loan).

Refinancing a mortgage for more than the current balance and taking the difference as cash. You get immediate liquidity but increase your loan balance, reset your term, and pay closing costs.

Fees paid at loan closing, typically 2–5% of the purchase price for a mortgage. Includes lender fees (origination, underwriting), third-party fees (appraisal, title insurance, attorney), and prepaid items (property taxes, insurance, prepaid interest). The lender provides a Loan Estimate within 3 business days of application.

A mortgage that meets Fannie Mae and Freddie Mac's purchase guidelines, including loan size limits set by FHFA. In 2026, the conforming limit is $806,500 in most areas ($1,209,750 in high-cost areas). Loans above these limits are jumbo loans.

A mortgage not backed by the federal government. Requires typically 620+ credit score and offers competitive rates with 20% down (avoiding PMI). Includes conforming and jumbo loans.

A numerical score (300–850) calculated from your credit history that predicts repayment likelihood. Components: payment history (35%), amounts owed (30%), credit history length (15%), new credit (10%), credit mix (10%). Scores above 740 get the best loan rates.

Combining multiple debts into a single loan, ideally at a lower interest rate. Can reduce monthly payment, simplify finances, and lower total interest paid — but only if the new rate is genuinely lower and you don't extend the term excessively or accumulate new debt.

Monthly debt payments divided by gross monthly income, expressed as a percentage. Front-end DTI covers housing only (target: under 28%). Back-end DTI includes all debts (target: under 36–43%). Maximum DTI varies by loan type: conventional 45%, FHA 50%, VA flexible.

Failure to repay a loan according to its terms. For mortgages, default can lead to foreclosure. For student loans, default triggers wage garnishment and credit damage. Federal student loan default occurs after 270 days of non-payment; most other loans default after 30–90 days.

The decrease in an asset's value over time. For vehicles, rapid depreciation (new cars lose 15–25% in year 1) makes buying new especially costly. For taxes, depreciation allows businesses to deduct the cost of assets over their useful life.

Upfront fees paid to the lender to permanently reduce the interest rate. One point = 1% of the loan amount, typically reducing the rate by about 0.25%. Worth paying if you'll hold the loan long enough to recoup the upfront cost through lower payments.

Cash paid upfront toward a purchase, reducing the amount financed. Mortgage down payments of 20%+ avoid PMI on conventional loans. FHA requires as little as 3.5%. VA and USDA allow 0% down. Larger down payments mean lower monthly payments and less total interest.

The true annualized cost of a loan accounting for all fees and the time value of money, calculated using the IRR (internal rate of return) method specified by Regulation Z. For short-term loans like payday loans, the effective APR can be 300–400% even if the flat fee seems modest.

The portion of a property you own outright — market value minus outstanding loan balance. Home equity builds through mortgage paydown and appreciation. Equity can be accessed via cash-out refinance, home equity loan, or HELOC.

A neutral third-party account that holds funds during a transaction or on an ongoing basis. Mortgage servicers often collect property taxes and homeowner's insurance through an escrow account, then pay them on your behalf when due. This spreads large annual bills across monthly payments.

A pricing method used by merchant cash advance providers instead of APR. A factor rate of 1.25 means borrow $50,000, repay $62,500. Factor rates obscure the true cost — a 1.25 factor on a 6-month advance equals approximately 75% APR. Always convert factor rates to effective APR before comparing.

A mortgage insured by the Federal Housing Administration. Requires as little as 3.5% down with a 580+ credit score (10% down with 500+). All FHA loans require mortgage insurance (MIP) — an upfront premium of 1.75% plus monthly premiums for the life of the loan if your down payment is under 10%.

See Credit Score. FICO (Fair Isaac Corporation) is the most widely used credit scoring model by mortgage lenders. FICO has multiple versions; mortgage lenders typically use FICO 2, 4, and 5 from the three bureaus.

A loan with an interest rate that never changes, resulting in identical monthly payments for the life of the loan. Provides payment certainty and protection against rising rates. Typically carries a slightly higher initial rate than an ARM in exchange for that stability.

A temporary pause or reduction of loan payments, typically granted during financial hardship. Interest usually continues to accrue. Federal student loans have generous forbearance provisions; COVID-era mortgage forbearance demonstrated its use at scale. Not the same as forgiveness — the missed payments must eventually be repaid.

The legal process by which a lender takes possession of a mortgaged property after a borrower defaults. The process and timeline vary by state. Most lenders begin foreclosure proceedings after 3–6 months of non-payment. Foreclosure severely damages credit and may result in a deficiency judgment for any shortfall.

Home Equity Line of Credit — a revolving credit line secured by your home's equity. You draw funds as needed during the draw period (typically 10 years), paying interest only on the amount drawn. After the draw period, the repayment period begins (typically 20 years) with required principal payments.

A fixed-rate, lump-sum loan secured by your home's equity — also called a second mortgage. Unlike a HELOC, you receive all funds upfront and make equal monthly payments. Rates are higher than first mortgages but lower than unsecured loans.

Federal student loan repayment plans that cap monthly payments at a percentage of discretionary income. After 20–25 years of qualifying payments, any remaining balance is forgiven. The four plans are SAVE, IBR, PAYE, and ICR. Essential to understand before deciding whether to aggressively pay off or pursue PSLF.

The annual percentage charged on the principal of a loan, not including fees. Lower than APR because it excludes required fees. The interest rate determines the interest portion of each monthly payment. For adjustable loans, the rate changes periodically based on an index.

Selling outstanding invoices to a factoring company at a discount for immediate cash. The factor advances 70–95% of the invoice face value and collects from your customers. Not technically a loan — it's a sale of receivables. Effective APR is typically 20–60%+.

A mortgage exceeding the conforming loan limits ($806,500 in most areas, $1,209,750 in high-cost areas for 2026). Jumbo loans are not eligible for purchase by Fannie Mae or Freddie Mac, so lenders hold them in portfolio. They typically require higher credit scores (720+), larger down payments, and carry slightly higher rates.

A standardized 3-page document lenders must provide within 3 business days of receiving a mortgage application. Shows the interest rate, monthly payment, and estimated closing costs. Use the Loan Estimate to compare offers from multiple lenders — the format is identical, making comparison straightforward.

The loan amount divided by the property's appraised value, expressed as a percentage. LTV of 80% means you're borrowing 80% of the property value (20% down or equity). Higher LTV = higher risk = potentially higher rate and PMI requirement. PMI is typically required when LTV exceeds 80% on conventional loans.

Insurance required on FHA loans — an upfront premium (1.75% of loan at closing) plus annual premiums (0.15–0.75% of loan balance depending on term and LTV). Unlike PMI, MIP typically lasts the life of the loan if your down payment was under 10%. Refinancing to a conventional loan is the main way to remove it.

See Discount Points. Also called 'buy-down points.' One point = 1% of the loan amount.

When monthly payments are less than the interest accruing, causing the loan balance to grow over time. Common in some ARM products with payment caps. Can lead to owing more than the original loan amount. Avoided by making at least interest-only payments.

Invoice factoring where the factor assumes the credit risk if the customer fails to pay due to insolvency or bankruptcy. Typically costs 1–2% more than recourse factoring. 'Non-recourse' usually only covers bankruptcy, not slow payment or disputes.

A lender charge for processing a loan application, typically 0.5–2% of the loan amount. Some lenders charge origination fees instead of or in addition to points. Origination fees are included in APR for most loan types. Negotiate — some lenders will waive or reduce origination fees.

Principal, Interest, Taxes, Insurance — the four components of a monthly mortgage payment. Lenders qualify borrowers on PITI, not just P&I. Property taxes and homeowner's insurance are often collected in escrow and added to the monthly payment.

Insurance required by conventional lenders when LTV exceeds 80% (down payment under 20%). Protects the lender, not the borrower. Typical cost: 0.5–1.5% of loan annually. Cancels automatically at 78% LTV; can be requested at 80% LTV.

See Discount Points.

A lender's conditional commitment to lend a specific amount based on verified income, assets, employment, and a credit check. Stronger than pre-qualification. In competitive markets, sellers often require pre-approval letters. Rate locks are typically tied to pre-approval.

An informal estimate of how much you might borrow based on self-reported information. No hard credit pull, no verification. Weaker than pre-approval and not binding on the lender.

The original amount borrowed, or the remaining loan balance excluding interest. Each mortgage payment reduces principal (after covering interest). Extra payments applied to principal directly reduce the balance and shorten the loan term.

A federal program that forgives remaining federal student loan balances after 120 qualifying monthly payments while working full-time for a qualifying employer (government, public schools, nonprofits). Forgiveness is tax-free. Must be on an IDR plan.

A lender's guarantee that your quoted interest rate will be held for a specified period (typically 30–60 days) while your loan is processed. Protects you from rate increases before closing. Some locks are free; longer locks may cost points.

Replacing an existing loan with a new loan, typically to get a lower rate, lower monthly payment, change the loan term, or access equity (cash-out refinance). Refinancing has closing costs (1–3% of loan) so you need to hold the loan long enough to break even.

A loan where the lender can pursue the borrower's other assets if the collateral doesn't cover the full balance after default. Most residential mortgages are recourse loans in most states. Non-recourse loans limit the lender to only the collateral.

Saving on a Valuable Education — the newest IDR repayment plan for federal student loans. Payments are 5% of discretionary income for undergrad loans, 10% for grad loans, and 0% if income is below 225% of the poverty line. Shorter forgiveness for smaller balances.

An IRS provision allowing businesses to immediately deduct the full cost of qualifying equipment and software in the year of purchase, rather than depreciating over time. 2024 limit: $1,220,000. Phases out when total equipment purchases exceed $3,050,000.

Interest calculated only on the original principal: I = P × R × T. Unlike compound interest, simple interest does not earn interest on previously accrued interest. Used for some short-term loans and car loans (which use daily simple interest on the declining balance).

The benchmark interest rate that replaced LIBOR for adjustable-rate loans. ARM loan rates are typically calculated as SOFR + a fixed margin. SOFR is published daily by the Federal Reserve Bank of New York based on overnight Treasury repurchase transactions.

Federal law requiring lenders to clearly disclose loan terms including APR, finance charge, amount financed, and total of payments before you sign. Implemented by Regulation Z. Gives borrowers a 3-day right of rescission on refinances and home equity loans.

Insurance protecting against defects in a property's title — undisclosed liens, ownership disputes, forgery, or errors in public records. Lender's title insurance (protecting the lender) is required at closing. Owner's title insurance (protecting you) is optional but recommended. It's a one-time premium paid at closing.

The lender's process of evaluating a loan application — verifying income, assets, employment, and appraising the property. Automated underwriting (DU for Fannie Mae, LP for Freddie Mac) makes initial decisions; complex cases go to human underwriters.

A zero-down mortgage backed by the U.S. Department of Agriculture for homes in eligible rural and suburban areas. Requires income eligibility (based on household size and county). Charges an upfront guarantee fee and annual fee (lower than FHA MIP). No down payment required.

A mortgage benefit for veterans, active-duty service members, and eligible surviving spouses, backed by the Department of Veterans Affairs. Key benefits: 0% down, no PMI, competitive rates. Charges a funding fee (1.25–3.3% of loan) that can be financed. One of the best mortgage products available for those who qualify.

A one-time fee charged on VA loans (not traditional PMI). Ranges from 1.25% (10%+ down, subsequent use) to 3.3% (0% down, subsequent use) of the loan amount. Can be financed into the loan. Waived for veterans with service-connected disabilities.

The blended interest rate across multiple loans, calculated by multiplying each loan's rate by its balance, summing those products, and dividing by the total balance. Used in debt consolidation and student loan refinancing to determine whether a new rate is actually lower.