updated august 2023
What the HELOC?
The financial world is brimming with acronyms and baffling terms. Here's a beginner's guide.
Excited about your new bridge loan? We regret to inform you: You don't get a bridge. Also disappointing: Your balloon payment will be less fun than it sounds.
Jargon is confusing, by definition. The financial world has its own set of cryptic words and phrases. And, yet, it's important to know your mortgage options and to understand the fine print that arrives with your credit card. Here are some potentially confounding terms that pop up frequently.
1. APR.
Annual percentage rate refers to the finance charges you'll pay over one full year on a loan or credit card.
2. APY
Annual percentage yield is the interest you earn on your savings account (or certificate of deposit, money market account, or other deposit accounts). It's based on an interest rate and how often it's compounded (added to your original deposit, basically, so you earn interest on your interest) over a year.
3. Interest rate
Interest rates, which can be fixed or variable, are used to determine the cost of borrowing money and how much you will earn. The rate may vary based on the risk involved in providing a loan which can affect your credit score, your collateral, etc.
4. ARM.
With an adjustable-rate mortgage, your monthly payments might go up and down as interest rates change. Not all ARMs are created equal. A 3/1 ARM, for example, offers a fixed interest rate for three years but will adjust every year after that. A 5/2 ARM has a fixed rate for five years but will adjust every two years after that.
5. Balloon payment loan.
A type of loan with a big payment at the end of the term.
6. Bridge loan.
This is a short-term loan you might use until you can get a larger or longer-term loan. Some people call it a swing loan or gap financing.
7. Collateral.
Something of value you pledge to your lender in case you don't pay back your loan. For example, you might put up your home as collateral to get a business loan. If you don't pay the loan, the lender could take your home.
8. Equity.
The value of property above and beyond the amount you owe on it.
9. HELOC.
If you get a home equity line of credit, you can borrow money as you need it (up to a certain amount). You use the equity in your home as collateral.
10. PMI
Private mortgage insurance is a form of protection for lenders, which you may need to pay if you have a conventional loan. It does not safeguard you, the borrower in case you fail to make payments on your debt.
Explain, please.
When your personal finances are at stake, you should always feel free to ask for explanations and clarifications from your loan officer, branch teller, or credit card issuer.
