adminAmortisation
This is the process of paying off your debt in regular instalments over a fixed period of time. Your mortgage is amortized using monthly payments that are calculated based on the amount borrowed, plus the interest that you would pay over the life of the loan.
ARM
An acronym for adjustable rate mortgage, it’s a type of mortgage in which the interest you pay on your outstanding balance rises and falls based on how interest rates are changing in the larger market. ARMs usually start out at a fixed rate for a short period of time, which then resets annually.
For example, if you have a five-year ARM, you will have a set rate for the first five years. Then the rate will change based on the terms of your mortgage. This means your monthly mortgage payment could start out low, but then rise (sometimes significantly) after the fixed-rate period is over.
Escrow
An account held by an impartial third party on behalf of two parties in a transaction. During the homebuying process, the buyer will deposit a specified amount in an escrow account that neither party can access until the terms of the purchase contract, such as passing an inspection, have been fulfilled and the sale is completed.
An escrow account can also hold money that will later be used to pay your homeowners insurance and property taxes. You can put money in escrow every month, so that when your premiums and taxes are due, you have enough to cover those bills.
Fixed-Rate Mortgage.
A mortgage that carries a fixed interest rate for the entire life of the loan. With a fixed-rate mortgage, you don’t have to worry about your payments going up if interest rates rise. The downside is that you could be locked into a more expensive mortgage if interest rates go down.
Private Mortgage Insurance
Also known as PMI, it’s a type of insurance that mortgage lenders require when homebuyers provide a down payment of typically less than 20 percent. The premiums are usually tacked onto the amount homeowners pay each month. For some mortgages, once your loan-to-home-value ratio reaches 80 percent, you no longer have to pay PMI, but in some cases, it is permanent for the life of the loan.
Net Worth
The difference between your assets and liabilities. You can calculate yours by adding up all of the money or investments you have, including the current market value of your home and car, as well as the balances in any checking, savings, retirement or other investment accounts. Then subtract all of your debt, including your mortgage balance, credit card balances and any other loans or obligations. The resulting net worth number helps you take the pulse on your overall financial health.
Asset Allocation
The process by which you choose what proportion of your portfolio you’d like to dedicate to various asset classes, based on your goals, personal risk tolerance and time horizon. Stocks, bonds and cash or cash alternatives (like certificates of deposit) make up the three major types of asset classes, and each of these reacts differently to market cycles and economic conditions.
Stocks, for instance, have the potential to provide growth over time, but may also be more volatile. Bonds tend to have slower growth, but are generally perceived to have less risk. A common investment strategy is to diversify your portfolio across multiple asset classes in order to spread out risk while taking advantage of growth.
Bonds
Commonly referred to as fixed-income securities, bonds are essentially investments in debt. When you buy a bond, you’re lending money to an entity, typically the government or a corporation, for a specified period of time at a fixed interest rate (also called a coupon). You then receive periodic interest payments over time, and get back the loaned amount at the bond’s maturity date. Bond prices tend to move in the opposite direction of interest rates — that is, when interest rates rise, bond prices typically fall.
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