Financial Glossary

A comprehensive glossary of financial terms explained in plain English.

• APR vs. Interest Rate — APR (Annual Percentage Rate) includes the interest rate plus fees, giving a fuller picture of borrowing costs.
• Amortization — The process of spreading loan payments over time so each payment covers both principal and interest.
• Down Payment — The upfront cash you pay when purchasing a home, expressed as a percentage of the purchase price.
• Fixed-Rate Mortgage — A mortgage with an interest rate that stays the same for the entire term of the loan.
• Adjustable-Rate Mortgage (ARM) — A mortgage where the interest rate can change periodically after an initial fixed-rate period.
• Closing Costs — Fees and expenses paid at the closing of a real estate transaction, typically 2–5% of the loan amount.
• Private Mortgage Insurance (PMI) — Insurance required when your down payment is less than 20%, protecting the lender if you default.
• Refinancing — Replacing your existing mortgage with a new one, typically to get a lower rate or change the loan term.
• Principal — The original amount of money borrowed in a loan, not including interest or fees.
• Interest Rate — The percentage of a loan amount charged by the lender for borrowing money, expressed annually.
• Compound Interest — Interest calculated on both the initial principal and the accumulated interest from previous periods.
• Credit Score — A numerical rating (300–850) that represents your creditworthiness based on your credit history.
• Debt-to-Income Ratio (DTI) — The percentage of your gross monthly income that goes toward paying debts, used by lenders to assess borrowing capacity.
• High-Yield Savings Account — A savings account that pays a significantly higher interest rate than a traditional savings account.
• Annual Percentage Yield (APY) — The real rate of return on a savings account or investment, accounting for the effect of compounding interest.
• Emergency Fund — A cash reserve set aside for unexpected expenses or financial emergencies, typically 3–6 months of living expenses.
• 401(k) — An employer-sponsored retirement savings plan that allows employees to save and invest a portion of their paycheck before taxes.
• Diversification — An investment strategy that spreads risk by allocating investments across different asset classes, sectors, and geographies.
• ETF (Exchange-Traded Fund) — A type of investment fund that trades on stock exchanges and holds a basket of assets like stocks, bonds, or commodities.
• Inflation — The rate at which the general level of prices for goods and services rises, eroding purchasing power over time.
• Consumer Price Index (CPI) — A measure of the average change over time in the prices paid by consumers for a basket of goods and services.
• Purchasing Power — The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.