Glossary

Financial and Bankruptcy Terms

1. Annual Percentage Rate (APR)The finance charge or total amount it costs to borrow money for one year on a credit card or loan. The APR is calculated as a percentage of the amount borrowed and includes interest, service charges, and transaction fees. The Truth and Lending Act requires creditors to provide consumers with this information when they apply for a credit card or loan.

2. CreditThe ability to obtain goods or services before making payment with the expectation that payment will be made in the future.

3. Credit BureauA company that collects personal data and information on your credit management and payment practices and then makes this information available to businesses who have a financial interest in you, such as credit card companies, financial institutions, mortgage providers, landlords, and employers. Also known as a “credit reporting agency.” Equifax, Experian, and TransUnion are the three major U.S. credit reporting agencies.

4. Credit ReportA credit report contains information about your credit and bill repayment history. It details how often you pay your bills on time, how much credit you have available, how much credit you currently owe and generally use, and whether debt or collection agencies have taken over your accounts. Credit reports also include your rental payment history and list public records such as liens, judgments, and bankruptcies. We are all legally entitled to one free credit report from each of the three major credit reporting agencies every 12 months. Go to www.annualcreditreport.com to request yours.

5. Credit ScoreA numerical rating used by lenders to determine whether you qualify for credit. There are many types of credit scores. Each relies on its own complex mathematical model to determine how financially viable you are. They are derived from information in your credit report. The most commonly used credit score is known as “FICO,” because it was developed by the Fair Isaac Corporation. FICO scores range from 300 to 850. When you apply for a credit card, loan, mortgage, or other services, the higher your FICO score, the better chance you have to be approved.

6. Debt-to-Income RatioThe percentage of your gross monthly income that goes toward paying for your monthly debts, such as for housing, child support, alimony, car payments, student loans, other installment loans, and revolving credit accounts.

7. DischargeA discharge releases a debtor from personal liability for specific types of debt that are set forth in the Bankruptcy Code. Debt covered under a discharge is known as “dischargeable debt.” A discharge prevents creditors who are owed these debts from contacting the debtor or taking further action to collect against them.

8. EquityThe difference between how much your personal property is worth and how much you still owe on it. For example, if you own a $24,000 car, but still owe $10,000 on the auto loan for it, your equity in the car is $14,000. If your home is valued at $125,000 and you still owe $95,000 on your mortgage, you currently have $30,000 in equity.

9. Exempt PropertySpecific property the Bankruptcy Code or applicable state law allows an individual debtor to continue to own once a bankruptcy is complete. For example, in some states, the debtor may be able to exempt all or a portion of the equity in his or her primary residence (homestead exemption), or some or all "tools of the trade" used by the debtor to make a living (e.g., dental equipment for a dentist, auto tools for a car mechanic). The availability and amount of property the debtor may exempt depends on the state in which he or she lives.

10. Installment CreditWhen you take out installment credit, you borrow a specific amount of money, then make set payments on what you owe. For example, when you take out a car loan, you know the amount of the payment and how many payments you'll need to repay it. As you make the payments, the balance on the account is reduced. Mortgage loans and student loans are also installment credit examples.

11. Revolving Credit AccountA revolving account permits you to borrow money up to a specific amount. For example, if you have a credit card with a $3,000 limit, you are able to borrow any amount up to $3,000. The payment amount on this type of account depends on how much you borrow. As with an installment account, the balance goes down as you make payments. However, on a revolving credit account, you can continue borrowing as you make payments. Credit cards, home equity lines of credit, and accounts with overdraft protection are types of revolving credit accounts.

12. Secured Credit/Unsecured CreditWhen you take out secured credit, you pledge personal property (collateral), such as a your home or car, to backup the repayment of what you owe. If you default or stop paying on a secured loan, the bank or creditor has the right to seize and keep this collateral. In contrast, unsecured credit is not backed up by collateral. For lenders this type of loan involves increased risk, because it is solely tied to your personal finance picture and cash flow.

Housing Terms

1. Adjustable Rate Mortgage (ARM)Also known as a “variable rate” loan. A mortgage where the rate of interest is adjusted periodically in response to market conditions. The initial interest rate on an ARM is generally set below the market rate on a comparable fixed-rate mortgage. This rate remains constant for a fixed period, but later adjusts from time-to-time to reflect the current interest rate. Before locking into an ARM, it’s important to consider if you’ll be able to afford the monthly mortgage payment even if the interest rate goes up.

2. Closing CostsThe costs required to complete a real estate transaction. These costs do not include the price of the home and are paid when you close on the property. They may include points, title insurance, taxes, financing costs, and items that must be escrowed or prepaid. Ask your lender for a complete list of closing costs.

3. Deed/Deed of TrustA deed is a legal document that transfers ownership or title on a property. A deed of trust is a legal document that lets you transfer the title on property to a third party (trustee) to hold as security for a lender. When you pay off the loan, the trustee transfers the title back to you. If you default on the loan, the trustee sells the property to pay the lender what you owe.

4. Deed-in-Lieu of ForeclosureA deed-in-lieu of foreclosure cancels your mortgage obligation when you voluntarily transfer your property title to the mortgage company. Before a lender will consider this option, you usually have to place your home up for sale at its fair market value for at least 90 days. This may not be an option if you have other liens on your property, such as a second mortgage, judgments from creditors, or tax liens.

5. EquityThe difference between how much your personal property is work and how much you still owe on it. For example, if you own a $24,000 car, but still owe $10,000 on the auto loan for it, your equity in the car is $14,000. If your home is valued at $125,000 and you still owe $95,000 on your mortgage, you currently have $30,000 in equity.

6. EscrowMoney or documents held by a neutral third party before you close on a property. After you purchase a home, this can also be an account maintained by your lender where you deposit money to pay for property taxes and homeowner’s insurance.

7. Fixed Rate MortgageA mortgage with an interest rate that doesn’t change during the entire loan payment term.

8. Home Equity Conversion Mortgage (HECM)HECMs are federally backed, federally insured reverse mortgage loans that include regulated fees that cover homes worth up to $625,500. Other reverse mortgages are private or “proprietary” loans. These are solely backed by the companies that develop them and may be approved for homeowners with property valued above $625,500.

9. Home Equity Line of Credit (HELOC)A HELOC is a form of revolving credit in which your home serves as collateral. This type of loan may help you pay for education, home improvements, or costly medical expenses. However, be cautious: If you are not able to keep up loan payments on the HELOC, you may lose your home.

10. LienA debt-related charge or claim on property. For example, a mortgage lender has the right to take the title to your property if you don't make your loan payments.

11. Private Mortgage InsuranceAlso known as “personal mortgage insurance,” “PMI,” or “MI.” This is insurance that protects the lender in case you are unable to make your mortgage payments. It is normally required if you do not make at least a 20 percent down payment when you buy a home.

12. Repayment PlanThis agreement allows you to repay the amount you’re behind on a home loan in a set period of time. During this period, a portion of the amount that’s past due is combined with your regular monthly mortgage payment. At the end of the repayment period, you have gradually paid back the amount your mortgage was delinquent.