Financial Terms Glossary
Clear definitions of APR, discount points, LTV, DTI, and other essential financial terms. Reference for understanding mortgage, auto loan, HELOC, and credit card rates.
Last updated: June 1, 2026
General Terms
APR (Annual Percentage Rate)
The total annual cost of borrowing expressed as a percentage, including the base interest rate plus fees and discount points spread over the loan term. APR is useful for comparing total cost between lenders, but assumes the borrower keeps the loan for the full term.
Interest Rate
The base cost of borrowing money, expressed as an annual percentage. Unlike APR, interest rate does not include fees or points. Your monthly payment is calculated using the interest rate, not the APR.
DTI (Debt-to-Income Ratio)
The percentage of your gross monthly income that goes toward paying debts, including the proposed mortgage payment. Lenders typically require a DTI below 43% for qualified mortgages. Lower DTI ratios may qualify for better rates.
Prime Rate
The interest rate that commercial banks charge their most creditworthy customers. The prime rate is typically 3% above the federal funds rate. Many consumer loans (HELOCs, credit cards) are priced as "prime plus" a margin.
Margin
The fixed percentage added to an index rate (like prime) to determine your loan rate. For example, a HELOC at "prime + 1%" with prime at 8.5% would have a rate of 9.5%. The margin remains constant even as the index rate changes.
Amortization
The process of paying off a loan through regular payments over time. In an amortizing loan, each payment includes both principal and interest. Early payments are mostly interest; later payments are mostly principal. A 30-year amortization means the loan is fully paid in 30 years of regular payments.
Principal
The original amount borrowed, excluding interest. As you make payments, the principal balance decreases. Principal also refers to the portion of your monthly payment that reduces the loan balance, as opposed to the interest portion.
Monthly Payment
The amount due each month on a loan, typically including principal and interest. For mortgages, the payment may also include escrow for property taxes and insurance (PITI: Principal, Interest, Taxes, Insurance).
Credit Score
A numerical representation of creditworthiness, ranging from 300-850 (FICO). Scores above 740 typically qualify for the best rates. Lenders use credit scores to assess the risk of lending. Mortgage lenders typically pull scores from all three bureaus (Equifax, Experian, TransUnion).
Credit Union
A member-owned, not-for-profit financial cooperative. Credit unions typically offer lower rates than banks because they return profits to members rather than shareholders. Membership is based on common bonds (employer, community, association).
APR vs Interest Rate
Interest rate is the base cost of borrowing; APR includes rate plus fees and points. Use interest rate to calculate monthly payment; use APR to compare total cost between lenders. APR assumes you keep the loan for the full term.
Mortgage Terms
Discount Points
Upfront fees paid to reduce the mortgage interest rate, where 1 point equals 1% of the loan amount. For example, 2 points on a $500,000 loan costs $10,000 upfront. Each point typically reduces the rate by approximately 0.25%. Points only make financial sense if the borrower keeps the loan long enough to recoup the upfront cost through lower monthly payments.
Break-Even Period
The time it takes for monthly payment savings to equal the upfront cost paid for discount points. Calculated by dividing the total points cost by the monthly payment reduction. If break-even is 8 years and you sell the home in 5 years, paying points was a financial loss.
LTV (Loan-to-Value Ratio)
The ratio of the loan amount to the appraised value of the property, expressed as a percentage. An 80% LTV means the loan is 80% of the property value (20% down payment). Higher LTV ratios typically result in higher interest rates and may require private mortgage insurance (PMI).
PMI (Private Mortgage Insurance)
Insurance required by lenders when the borrower puts down less than 20% on a conventional loan. PMI protects the lender if the borrower defaults. Costs typically range from 0.3% to 1.5% of the loan amount annually. PMI can be removed once LTV reaches 80%.
Down Payment
The initial cash payment made when purchasing a property, expressed as a percentage of the purchase price. A 20% down payment on a $500,000 home is $100,000. Larger down payments typically result in lower interest rates and no PMI requirement.
Conforming Loan
A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan amount limits. In 2024, the conforming loan limit is $766,550 in most areas ($1,149,825 in high-cost areas). Conforming loans typically have lower interest rates than jumbo loans.
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans typically have higher interest rates and stricter qualification requirements because they cannot be sold to government-sponsored enterprises.
ARM (Adjustable-Rate Mortgage)
A mortgage with an interest rate that adjusts periodically based on a benchmark index. A 5/1 ARM has a fixed rate for 5 years, then adjusts annually. ARMs typically offer lower initial rates than fixed-rate mortgages but carry the risk of rate increases.
Fixed-Rate Mortgage
A mortgage with an interest rate that remains constant for the entire loan term. Common terms are 15, 20, and 30 years. Fixed-rate mortgages provide payment predictability but may have higher initial rates than ARMs.
Rate Cap
Limits on how much an adjustable-rate mortgage (ARM) can increase. Caps typically include: initial adjustment cap (first adjustment limit), periodic cap (each subsequent adjustment limit), and lifetime cap (total increase over the loan life).
Closing Costs
Fees and expenses paid when finalizing a mortgage, typically 2-5% of the loan amount. Includes origination fees, appraisal, title insurance, recording fees, and prepaid items (taxes, insurance). Some closing costs are negotiable.
Origination Fee
A fee charged by the lender for processing a new loan application, typically 0.5-1% of the loan amount. This covers the cost of underwriting, document preparation, and loan administration. Origination fees are included in APR calculations.
Escrow
A financial arrangement where a third party holds funds on behalf of two transacting parties. In mortgages, escrow refers to: (1) the account where a portion of your monthly payment is held for property taxes and insurance, and (2) the closing process where funds are held until all conditions are met.
Preapproval
A lender's conditional commitment to lend a specific amount based on verified financial information. Preapproval involves a credit check and income/asset verification. Stronger than prequalification, a preapproval letter shows sellers you're a serious buyer.
Prequalification
An estimate of how much you might be able to borrow, based on self-reported financial information. Prequalification is less rigorous than preapproval and doesn't require a credit check. It provides a general idea of your borrowing power.
Refinance
Replacing an existing loan with a new one, typically to get a lower interest rate, change the loan term, or access home equity (cash-out refinance). Refinancing involves closing costs, so the break-even period must justify the expense.
Cash-Out Refinance
Refinancing for more than the current loan balance and receiving the difference in cash. Often used for home improvements, debt consolidation, or major purchases. Cash-out refinances typically have slightly higher rates than rate-and-term refinances.
HELOC Terms
HELOC (Home Equity Line of Credit)
A revolving line of credit secured by your home equity. HELOCs have a draw period (typically 10 years) during which you can borrow and repay, followed by a repayment period. Most HELOCs have variable rates tied to the prime rate.
Home Equity
The difference between your home's market value and the outstanding mortgage balance. If your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. Home equity can be accessed through HELOCs, home equity loans, or cash-out refinancing.
Draw Period
The initial phase of a HELOC during which you can borrow against your credit line. Draw periods typically last 5-10 years. During this time, you may only be required to pay interest on the amount borrowed.
Repayment Period
The phase of a HELOC after the draw period ends, during which you can no longer borrow and must repay both principal and interest. Repayment periods typically last 10-20 years. Monthly payments increase significantly when this period begins.
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