Financial Glossary
38 financial terms defined in plain English. Every definition opens with a direct one-sentence answer, then explains why the term matters when you are borrowing, budgeting or filing taxes.
Mortgage & Home Buying
- Amortization
- Amortization is the process of paying off a loan through fixed periodic payments that cover both interest and principal. Early payments are mostly interest; over time the balance shifts toward principal. An amortization schedule shows this split for every payment across the life of the loan.See a full amortization schedule →
- PITI
- PITI stands for principal, interest, taxes and insurance — the four components of a typical monthly mortgage payment. Lenders use the full PITI figure, not just principal and interest, when deciding how much you can borrow.Calculate your full PITI payment →
- PMI (Private Mortgage Insurance)
- PMI is insurance that protects the lender, not you, and is required on most conventional loans when your down payment is below 20%. Under the Homeowners Protection Act, lenders must automatically terminate PMI once the loan balance reaches 78% of the original property value, and you may request cancellation at 80%.Estimate your PMI cost →
- Escrow account
- An escrow account is a holding account your mortgage servicer uses to collect and pay your property taxes and homeowners insurance on your behalf. You pay roughly one-twelfth of the annual bills each month alongside your mortgage payment, so a large tax bill never arrives all at once.
- Loan-to-value ratio (LTV)
- LTV is the loan amount divided by the property value, expressed as a percentage. A $240,000 loan on a $300,000 home is 80% LTV. Lower LTV means less lender risk, which generally unlocks better rates and removes the PMI requirement at 80% or below.Test different down payments →
- Debt-to-income ratio (DTI)
- DTI is your total monthly debt payments divided by your gross monthly income. Most conventional lenders look for a back-end DTI at or below 43%, though some programs allow more. It is the single biggest factor in how much house a lender will approve you for.Check affordability →
- Closing costs
- Closing costs are the one-time fees paid to finalise a property purchase, typically 2% to 5% of the loan amount. They cover lender origination, appraisal, title search and title insurance, recording fees, and prepaid property taxes and insurance.
- Pre-approval
- A pre-approval is a lender's conditional written commitment to lend a specific amount after verifying your credit, income and assets. It differs from a pre-qualification, which is only an informal estimate based on figures you report yourself and carries little weight with sellers.
- Mortgage recast
- A recast re-amortizes your existing mortgage over its remaining term after you make a large lump-sum principal payment, lowering your monthly payment without refinancing. It typically costs a few hundred dollars in fees and keeps your original interest rate, unlike a refinance.Model extra payments →
- Fixed-rate vs adjustable-rate mortgage (ARM)
- A fixed-rate mortgage keeps the same interest rate for the entire term, while an ARM starts with a fixed introductory period and then adjusts periodically against an index. A 5/1 ARM, for example, is fixed for five years and then adjusts annually.Compare loan structures →
- FHA loan
- An FHA loan is a mortgage insured by the Federal Housing Administration that allows a down payment as low as 3.5% with a credit score of 580 or above. The trade-off is a mortgage insurance premium that, on most current FHA loans, lasts the life of the loan unless you refinance out of it.
- Conforming loan limit
- The conforming loan limit is the maximum mortgage amount that Fannie Mae and Freddie Mac will purchase, set annually by the Federal Housing Finance Agency. Loans above this limit are called jumbo loans and carry stricter credit, reserve and down payment requirements.
- Title insurance
- Title insurance protects against financial loss from defects in a property's ownership history, such as unpaid liens, forged documents or undisclosed heirs. A lender's policy protects the lender only; an owner's policy is a separate, optional one-time purchase that protects you.Texas title premium calculator →
Loans & Credit
- APR (Annual Percentage Rate)
- APR is the yearly cost of borrowing expressed as a percentage, including the interest rate plus lender fees and points. It is always equal to or higher than the note rate, which is why APR is the fairer number when comparing offers from different lenders.Compare loan offers →
- Principal
- Principal is the amount of money you actually borrowed, separate from the interest charged on it. Every payment splits between reducing principal and paying interest, and only the principal portion builds your equity.
- Compound interest
- Compound interest is interest calculated on both the original principal and on previously accumulated interest. It works against you on debt and for you on savings; the more frequently it compounds, the faster the balance grows.Project compound growth →
- Credit utilisation
- Credit utilisation is the percentage of your available revolving credit that you are currently using. Keeping it below 30% is the widely cited threshold for protecting your score, and it is one of the fastest credit factors to improve before applying for a mortgage.
- DSCR (Debt Service Coverage Ratio)
- DSCR is a property's net operating income divided by its annual debt payments, used to underwrite commercial real estate loans. A DSCR of 1.25 means the property generates 25% more income than needed to cover the loan, which is a common minimum for lenders.Calculate DSCR →
- Balloon payment
- A balloon payment is a large lump sum due at the end of a loan whose regular payments were too small to fully amortize the balance. Commercial mortgages frequently use this structure, requiring the borrower to refinance or sell when the balloon comes due.Model a balloon loan →
Paycheck & Payroll Tax
- Gross pay vs net pay
- Gross pay is your total earnings before any deductions; net pay, or take-home pay, is what remains after taxes, benefits and other withholdings. The gap between the two is usually 20% to 35% depending on your state, filing status and benefit elections.Calculate your take-home pay →
- FICA
- FICA is the combined Social Security and Medicare payroll tax withheld from your wages. Employees pay 6.2% for Social Security up to an annual wage base limit, plus 1.45% for Medicare on all wages, and employers match both amounts.See your FICA breakdown →
- Form W-4
- Form W-4 tells your employer how much federal income tax to withhold from each paycheck. The modern version removed withholding allowances and instead uses dependent amounts, other income and deduction estimates to set your withholding directly.Test W-4 settings →
- Pre-tax deduction
- A pre-tax deduction reduces your taxable wages before income tax is calculated, lowering what you owe. Traditional 401(k) contributions reduce federal income tax but not FICA, while Section 125 health premiums and HSA contributions typically reduce both.Model pre-tax deductions →
- Supplemental wage withholding
- Supplemental wages such as bonuses and commissions are commonly withheld at a flat federal percentage rather than at your regular payroll rate. This is a withholding rule, not a separate tax — any over-withholding is refunded when you file your return.
Income Tax
- Marginal vs effective tax rate
- Your marginal tax rate is the rate applied to your last dollar of income; your effective rate is total tax divided by total income. Because the US uses graduated brackets, your effective rate is always lower than your marginal rate — moving into a higher bracket never reduces your take-home pay.See both rates →
- Standard deduction
- The standard deduction is a flat amount you can subtract from income instead of itemising individual deductions. You take whichever is larger — the standard deduction or your total itemised deductions — and the large majority of filers take the standard.Compare standard vs itemised →
- Tax deduction vs tax credit
- A deduction reduces the income you are taxed on, while a credit reduces your tax bill dollar-for-dollar. A $1,000 credit saves you $1,000; a $1,000 deduction saves you $1,000 multiplied by your marginal rate, so credits are substantially more valuable.
- SALT deduction
- The SALT deduction lets itemising taxpayers deduct state and local income, sales and property taxes, subject to a statutory dollar cap. The cap is what pushes many homeowners in high-tax states toward the standard deduction instead.
- Capital gains tax
- Capital gains tax applies to profit from selling an asset such as stock or property. Assets held over one year qualify for lower long-term rates, while shorter holdings are taxed as ordinary income. A primary-residence sale may qualify for a significant gain exclusion.
Insurance
- Liability coverage
- Liability coverage pays for injury and property damage you cause to others, and every state that requires auto insurance requires it. Limits are written as three numbers such as 30/60/25, meaning $30,000 per person injured, $60,000 per accident and $25,000 for property damage.Check your state minimums →
- Full coverage
- Full coverage is an informal term for liability insurance combined with comprehensive and collision coverage. It is not a legal category — it simply means your own vehicle is protected as well as other people's, typically costing two to three times a minimum-liability policy.Compare coverage costs →
- Deductible
- A deductible is the amount you pay out of pocket before insurance covers the rest of a claim. Choosing a higher deductible lowers your premium but increases your exposure, so the deductible should never exceed what you could comfortably cover in an emergency.
- Uninsured motorist coverage
- Uninsured motorist coverage pays your costs when an at-fault driver has no insurance or too little of it. It is mandatory in some states and optional in others, and its value rises with the share of uninsured drivers where you live.See uninsured rates by state →
Investing & Retirement
- 401(k)
- A 401(k) is an employer-sponsored retirement account funded by payroll deferrals, often with an employer match. Traditional contributions reduce taxable income now and are taxed at withdrawal; Roth contributions are taxed now and withdraw tax-free in retirement.Project retirement savings →
- The 4% rule
- The 4% rule is a retirement guideline suggesting you can withdraw 4% of your portfolio in the first year of retirement, then adjust for inflation annually, with a high probability the money lasts 30 years. It is a planning heuristic derived from historical returns, not a guarantee.Test withdrawal scenarios →
- Dollar-cost averaging
- Dollar-cost averaging is investing a fixed amount at regular intervals regardless of price, which buys more shares when prices are low and fewer when high. It removes market timing from the decision and is how most workplace retirement contributions already operate.Model regular contributions →
- The 50/30/20 rule
- The 50/30/20 rule allocates after-tax income to 50% needs, 30% wants and 20% savings and debt repayment. It is a starting framework rather than a strict prescription — high-cost-of-living areas often require adjusting the needs share upward.Build a 50/30/20 budget →
- Emergency fund
- An emergency fund is cash reserved for unplanned expenses such as job loss, medical bills or urgent home repairs. Three to six months of essential expenses is the common target, held in a liquid account rather than invested in the market.Plan your savings →
Put these terms to work
Every definition above maps to a free calculator. Run your own numbers instead of relying on rules of thumb.