Understanding personal finance is nearly impossible if you aren’t up to date with the terminology used by banks, credit card companies and other financial institutions. Broadening your financial vocabulary will make it easier for you to understand what’s happening around you in the financial world.
Read on to learn 10 common personal finance terms and what they mean in laymen’s terms.
APR stands for annual percentage rate. This is basically a number representing a percentage of the total loan. Think of the APR as a fee for borrowing money. In general, you want to choose loans with the lowest APR’s you can find, because that means lower fees and a lower cost of borrowing money.
MIP stands for mortgage insurance premium. This is a fee charged by mortgage lenders that goes towards a pool of money used when a borrower defaults. Your mortgage insurance premiums will go towards paying off another borrower’s loan if they default, and other people’s mortgage insurance premiums will go towards paying off your loan if you default. Usually, the MIP disappears once you reach 20% equity.
Equity is a term that expresses the amount of your property that you own. For a home, the equity is the difference between the market value and the loan value. For example, if your home is worth $200,000 and you owe $100,000, you have $100,000 of equity. Equity changes with the housing market.
Your portfolio is made up of all your individual investments. Stocks, property and other investments can all become part of your financial portfolio.
5. Day Trader
Day traders are people who buy and sell stocks in short periods of time. They rarely hold onto a stock overnight, which is why they are called day traders. The strategy of day trading involves taking advantage of quick changes and fluctuations in a stock price to make money quickly. Typically, day trading gains are smaller than longer-term investments, but they come more rapidly.
6. Negative Amortization
If you have a loan, but your loan payments aren’t enough to cover the interest, you wind up in a situation where the principal of the loan increases. This situation is known as negative amortization. This phenomenon is common with ARM loans or ones with artificially low initial payments.
ARM stands for adjustable rate mortgage. These types of loans are what many have blamed for the housing bubble. An adjustable rate mortgage has an interest rate that changes at certain periods and is highly dependent on the market. If the rates go up, payments also go up, sometimes more than the buyer bargained for which as we’ve seen, can lead to problems.
Tailgating is an unethical practice in which a broker places an order for a security directly after placing an order for a client. While this practice isn’t illegal, it is believed to be unethical because the broker only buys believing that the client has inside information about the stock, or that the client has bought enough of the stock to influence the security price.
9. Origination Fee
The origination fee is usually calculated as a percentage of the total loan amount. This fee is meant to cover processing expenses for the lender. The origination fee may be subtracted from the total loan amount or it may be charged as a separate cost.
Rent-to-own is a real estate practice that involves renting a house to a potential buyer for a period of time before a sale is made. A portion of the monthly rent is set aside to be used as a down-payment if a sale is negotiated. If no sale occurs, the entire amount of the rent is retained by the property owner. An interested party may choose to rent-to-own if they are unsure of whether they want to purchase the house, or if they need additional time to come up with a down payment.
These 10 common financial terms are just the tip of the iceberg. Go out and educate yourself about finance to get a better understanding of the world around you. Maybe start with this article discussing the do’s and don’ts of investing, including helpful advice from experts like Richard Kimball Jr., founder and CEO of HExL, Inc.