A–D Terms
- Amortization: The process of paying off a loan over time through regular payments that cover both principal and interest. With a fully amortizing loan, the balance reaches zero at the end of the loan term.
- Amortization period (loan term): The length of time over which the loan is scheduled to be fully repaid, such as 15 or 30 years for a mortgage.
- Amortization schedule: A table that shows each periodic payment, how much goes toward principal and interest, and the remaining balance after each payment.
- Annual percentage rate (APR): The total cost of borrowing expressed as a yearly rate, including interest and certain fees. APR helps compare loan offers.
- Balloon payment: A large lump-sum payment due at the end of a loan that is larger than the regular periodic payments.
- Compound interest: Interest that is calculated on both the initial principal and the accumulated interest from previous periods.
E–H Terms
- Fixed-rate loan: A loan with an interest rate that remains the same for the entire term, keeping the principal-and-interest payment constant.
- Fully amortizing payment: A payment that, when made regularly, will reduce the loan balance to zero by the end of the amortization period.
- Grace period: A set period after a payment due date during which a payment can be made without penalty.
- Housing expense ratio: The percentage of gross monthly income that goes toward housing costs, often used by lenders to assess mortgage affordability.
I–M Terms
- Interest: The cost of borrowing money, expressed as a percentage of the outstanding principal. In an amortizing loan, interest is calculated on the remaining balance.
- Interest rate: The annual percentage charged on the outstanding loan balance, not including other fees.
- Loan balance: The amount of principal remaining unpaid at any point during the loan.
- Loan origination fee: An upfront charge by the lender for processing a new loan, often a percentage of the loan amount.
- Maturity date: The date on which the final loan payment is due and the loan is paid off.
- Mortgage: A loan used to purchase real estate, typically with a long amortization period and the property as collateral.
N–R Terms
- Negative amortization: A situation where the periodic payment is less than the interest due, causing the principal balance to increase rather than decrease.
- Payment frequency: How often payments are made, such as monthly, biweekly, or weekly.
- Prepayment: An extra payment applied directly to the principal, which can shorten the loan term and reduce total interest.
- Prepayment penalty: A fee charged by some lenders if you pay off all or part of the loan early.
- Principal: The original amount borrowed, excluding interest. In an amortizing loan, each payment reduces the principal balance.
- Private mortgage insurance (PMI): Insurance that protects the lender if the borrower defaults, typically required when the down payment is less than 20%.
S–Z Terms
- Simple interest: Interest calculated only on the principal, not on previously accumulated interest.
- Term: The duration of the loan, often synonymous with amortization period.
- Total interest: The sum of all interest payments made over the life of the loan.
- Variable-rate loan (adjustable-rate mortgage, ARM): A loan whose interest rate can change periodically, which may affect the payment amount.
- Yield: The income return on an investment, expressed as a percentage, often used in the context of mortgage-backed securities.