Glossary of Terms

Enhance your financial vocabulary, A to Z, and know the lingo.

There's a lot of terminology out there in the financial world, and it's often thrown around with the presumption that everyone's speaking the same language. We provide this glossary as a resource for our members to feel more confident when making important decisions.
 

Annual fee – a yearly fee charged for administering your credit cards. Many credit card companies charge an annual fee.

Annual percentage rate (APR) – the interest rate that reflects all the costs of the loan, including fees, points, and other directly related costs.

Annual percentage yield (APY) – the amount of interest earned on a deposit account (checking, savings, money markets, CDs, IRAs), including the effect of interest compounding, expressed as a yearly percentage and assuming funds remain in the account for at least one year.

Amortization schedule – a schedule that shows the portions of each payment that are applied to interest and to principal. It also shows the loan balance remaining after each payment.

Application fee or document fee – most lenders charge an application or document fee to process your paper work. Make sure you shop around for the best deal.

Auto payment – you can set your payments to be made automatically every month from your account.

Bankruptcy – a federal court proceeding in which a debtor who owes more than his or her assets can relieve the debts by transferring the assets to a trustee.

Collateral – the property you provide as security against a secured loan (e.g. house, car).

Collections – the process of recovering amounts owed to a business by its customers.

Co-signer – a person who signs and assumes joint liability with another person for repayment of a debt.

Credit limit – the maximum amount of credit that a bank or financial institution will extend for use.

Credit report – a report of an individual’s credit history prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

Credit reporting agencies – credit reporting agencies, also called credit bureaus, are organizations that collect and aggregate credit and personal information about consumers. Each consumer’s information is tracked by their Social Security Number. Some of the information that is collected includes credit transactions, credit limits, available credit, debt, addresses, employers, and payment histories. This information is collected in a credit report about each consumer. There are three major credit reporting agencies in the United States (Experian, Equifax and Transunion). You can obtain a free credit report from the agencies at the following addresses: Experian.com, Equifax.com, or Transunion.com.

Debt-to-Income Ratio – the ratio of a borrower’s monthly debt payments to his or her monthly gross income. Lenders use this ratio to assist them in determining how much to lend.

Delinquency – failure to make loan payments on time.

Finance charge – the charges that include all of the interest expected to be earned over the life of a loan, in addition to the service charges, mortgage insurance premiums and certain other charges related to a loan.

Grace period – a specified period after the regular due date of a loan payment during which no late charge or other penalty is assessed.

Installment loan – a type of loan that is paid in periodic and equal-sized payments, such as an auto loan.

Interest – the cost for borrowing money.

Late fee – a penalty fee for not making your payment on time.

Lien holder – the company or individual that has a lien on property.

Liabilities – a person’s financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.

Loan term – the period granted for loan repayment.

Line of credit – a pre-established amount of credit extended to a borrower by a lender that the borrower can draw against as needed.

Mortgage – a legal document that pledges a property to the lender as security for payment of a debt.

Over the limit fee – a fee imposed to you for spending more than the credit limit on your credit card.

Principal – the amount originally borrowed. Also that amount of the monthly loan payment that reduces the outstanding balance of a loan.

Principal and interest – the total amount needed to pay on a loan each month.

Revolving loan – a type of loan that does not have a fixed number of payments. As you pay the balance, the funds once again become available for use.

Signature loan – a loan requiring no collateral.

Title – evidence of a person’s right to possession ownership of a property.

Variable rate – an interest rate that may fluctuate during the term of the loan, line of credit or deposit account according to the changes in an index rate, such as the prime rate.

Annual percentage rate (APR) – the annual rate of interest without taking into account the compounding of interest within that year.

Annual percentage yield (APY) – the effective annual rate of return taking into account the effect of compounding interest. The annual percentage yield assumes that funds will remain in the investment for a full 365 days.

Compounding – your initial deposit earns interest that is added to your account balance. Interest is then earned on that new balance. Interest may be compounded monthly, quarterly, semi-annually or annually.

Minimum balance requirements – some accounts require that you maintain a minimum balance in your account.

Service fees and penalties – fees for savings accounts are usually pretty minimal, but be sure to read the fine print before you open an account. If your account falls below the minimum balance, you may be charged a service fee.

Additional Principal Payment - A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.

Adjustable-Rate Mortgage (ARM) - A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Amortization - The gradual repayment of a mortgage loan, both principle and interest, by installments.

Amortization Term - The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

Annual Percentage Rate (APR) - The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.

Appraisal - A written analysis prepared by a qualified appraiser and estimating the value of a property.

Appraised Value - An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.

Asset - Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Assumability - An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.

Balloon Mortgage - A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.

Balloon Payment - The final lump sum paid at the maturity date of a balloon mortgage.

Before-tax Income - Income before taxes are deducted.

Bridge Loan - A second trust that is collateralized by the borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."

Certificate of Eligibility - A document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs (VA) mortgage.

Closing - A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs.

Closing Costs - These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc.

Credit Report - A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.

Credit Risk Score - A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Isaac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

Down Payment - Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Escrow - An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

Escrow Disbursements - The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow Payment - The part of a mortgagor's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

FHA Mortgage - A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

First Mortgage - The primary lien against a property.

Housing Expense Ratio - The percentage of gross monthly income budgeted to pay housing expenses.

Interest - The fee charged for borrowing money.

Late Charge - The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

Liabilities - A person's financial obligations. Liabilities include long-term and short-term debt.

Loan-to-Value (LTV) Percentage - The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Lock-In Period - The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.

Maturity - The date on which the principal balance of a loan becomes due and payable.

Monthly Fixed Installment - That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreasing.

Mortgage - A legal document that pledges a property to the lender as security for payment of a debt.

Note - A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Origination Fee - A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

Points - A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

Principal - The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance - The outstanding balance of principal on a mortgage not including interest or any other charges.



Principal, Interest, Taxes, and Insurance (PITI) - The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI) - Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Qualifying Ratios - Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock - A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Refinance - Paying off one loan with the proceeds from a new loan using the same property as security.

Security - The property that will be pledged as collateral for a loan.

Servicer - An organization that collects principle and interest payments from borrowers and manages borrowers' escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Underwriting - The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.

VA Mortgage - A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.

As members of Capital Credit Union, you have access to our network of financial services all across North Dakota and into Minnesota. Contact us to learn more about our product offerings and open an account today.