Financial Glossary

The process of spreading loan payments over time. Each payment covers interest and a portion of principal. Early payments are mostly interest; later payments are mostly principal.

A mortgage with an interest rate that changes periodically based on a benchmark index. Typically starts with a lower fixed rate for 3-10 years, then adjusts annually.

Net Operating Income divided by property purchase price, expressed as a percentage. Measures the potential return on an investment property regardless of financing. Higher cap rates indicate higher potential returns but often higher risk.

Annual pre-tax cash flow divided by total cash invested. Unlike cap rate, this accounts for your financing structure. A 10% cash-on-cash return means you earn $10 annually for every $100 invested.

The total amount of money you need to bring to the closing table. Includes down payment, closing costs, prepaids, escrow setup, minus any lender credits.

Fees paid at closing beyond the down payment. Includes lender fees, title insurance, appraisal, attorney fees, recording fees, and more. Typically 2-5% of the purchase price.

A mortgage not backed by a government agency. Typically requires a higher credit score and larger down payment than government-backed loans. Conforming conventional loans follow Fannie Mae and Freddie Mac guidelines.

Net Operating Income divided by annual debt service (mortgage payments). A DSCR above 1.0 means the property generates enough income to cover its debt. Lenders typically require 1.2 or higher for investment property loans.

Total monthly debt payments divided by gross monthly income. Lenders use this to assess borrowing capacity. Generally, 36% or below is considered healthy; above 43% may make it difficult to qualify for a mortgage.

The upfront cash portion of the purchase price. For second homes, lenders typically require 10-25% down. Investment properties often require 20-30% down.

Gross potential rental income adjusted for expected vacancy and occupancy rate. Represents the realistic income you can expect from a rental property.

Cash reserves set aside for unexpected expenses. Financial advisors typically recommend 3-6 months of total expenses. With multiple properties, 6-12 months is often recommended.

An account held by the lender to collect monthly portions of property taxes and insurance. At closing, you may need to fund several months of escrow in advance (prepaids).

A revolving credit line secured by your home equity. Can be used as a funding source for a second property purchase but adds variable-rate debt to your primary home.

Monthly or annual fees paid to a homeowners association for maintenance of common areas, amenities, and sometimes exterior maintenance. Varies widely by property and location.

A tax break that reduces the assessed value of your primary residence for property tax purposes. Not available for second homes or investment properties in most states.

A loan where you only pay interest for a set period (typically 5-10 years). After the interest-only period, payments increase significantly as you begin paying principal.

A mortgage that exceeds the conforming loan limits set by the FHFA. Typically requires stronger credit, lower DTI, and larger down payment. Rates may be slightly higher.

How quickly and easily an asset can be converted to cash. Cash savings are highly liquid; real estate is illiquid. Buying property reduces your overall liquidity.

Insurance that protects the lender if you default. Required on conventional loans with less than 20% down payment. Can be removed once you reach 20% equity.

Total rental income minus all operating expenses (excluding mortgage payments). Used to calculate cap rate and DSCR. Includes taxes, insurance, management, maintenance, and vacancy.

The potential return you give up by choosing one investment over another. For example, using brokerage funds for a down payment means forgoing the market returns those funds would have earned.

Upfront fees paid to the lender to reduce your interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. Worth it if you plan to keep the loan long enough to recoup the cost.

Expenses paid in advance at closing. Typically includes prepaid interest (from closing date to month end), initial escrow deposits for property taxes and insurance.

Annual tax assessed by local government based on property value. Rates vary significantly by state and locality, from under 0.5% to over 2.5% of assessed value.

A tax charged when property ownership changes hands. Rates and who pays (buyer vs seller) vary by state and locality. Some states have no transfer tax.

Money set aside to cover periods when a rental property is unoccupied. Typically 5-10% of gross rent for long-term rentals, higher for short-term or vacation rentals.