US Glossary

The process of paying off a loan through regular scheduled payments over time. Each payment covers accrued interest first, then reduces the principal balance. Early payments are mostly interest; later payments are mostly principal.

A licensed appraiser's professional estimate of a property's market value, required by lenders before approving a mortgage. If the appraisal comes in below the purchase price, the buyer must renegotiate or cover the gap in cash.

The increase in a property's value over time. US residential property has historically appreciated at 3–5% annually on average, though this varies significantly by market and economic cycle.

A mortgage with an interest rate that changes periodically after an initial fixed period. A 5/1 ARM is fixed for 5 years, then adjusts annually. Rate changes are tied to an index (typically SOFR) plus a margin set by the lender.

The ratio of a property's Net Operating Income to its purchase price. Used to compare investment properties regardless of financing. A higher cap rate means higher return — and typically higher risk or a less desirable market.

The annual pre-tax cash flow divided by total cash invested. Unlike cap rate, cash-on-cash accounts for your actual financing — it measures the return on your out-of-pocket investment, not the full property value.

Fees and expenses paid at settlement to complete a property purchase. For buyers, typically 2–5% of the purchase price. Includes lender fees, title insurance, appraisal, attorney fees (in required states), prepaid taxes and insurance, and government recording fees.

The maximum loan amount eligible for purchase by Fannie Mae or Freddie Mac. Loans above this limit are called jumbo loans and typically carry higher rates. Adjusted annually by FHFA based on home price changes.

A mortgage not insured or guaranteed by a federal government agency. Backed by Fannie Mae or Freddie Mac guidelines. Requires minimum 620 credit score and 3% down payment. Best rates for borrowers with 740+ credit and 20% down.

The IRS allows rental property owners to deduct the cost of the building (not land) over 27.5 years using the straight-line method under the Modified Accelerated Cost Recovery System. This is a non-cash deduction that reduces taxable income without reducing cash flow.

The percentage of your gross monthly income that goes toward debt payments. Lenders use two DTI figures: front-end (housing costs only) and back-end (all monthly debts). The most important qualification metric for mortgage approval.

The upfront cash paid toward a property purchase, expressed as a percentage of the purchase price. Determines your loan-to-value ratio and whether PMI is required. Minimums vary by loan type.

The difference between a property's current market value and the outstanding mortgage balance. Equity grows through principal paydown and appreciation. It can be accessed via refinancing, HELOC, or cash-out refi.

A neutral third-party account that holds funds during a transaction. At closing, escrow holds the purchase funds until all conditions are met. For ongoing mortgages, lenders often require an escrow account to collect and pay property taxes and homeowners insurance.

A mortgage insured by the Federal Housing Administration. Allows lower credit scores (580+ for 3.5% down) and is more lenient on DTI. Requires mortgage insurance premium (MIP) for the life of the loan if down payment is under 10%.

Annual rental income as a percentage of property purchase price, before deducting any expenses. A quick screening metric — always compare net yield for actual investment decisions.

An organization in planned communities that enforces rules and maintains common areas. HOA fees are included in your front-end DTI calculation. Fees range from $100–1,000+/month depending on community amenities.

Rental income and expenses are reported on IRS Schedule E. Deductible expenses include mortgage interest, property taxes, insurance, repairs, management fees, and depreciation. Unlike the UK, the US allows full mortgage interest deduction on rental properties.

The ratio of your mortgage loan to the property's appraised value. Determines PMI requirements, interest rate pricing, and maximum loan eligibility. Lower LTV means better rates and no PMI.

The insurance premium paid on FHA loans, analogous to PMI on conventional loans. Has two components: an upfront premium added to the loan balance, and an ongoing annual premium paid monthly.

Gross rental income minus all operating expenses, excluding mortgage payments and income taxes. The fundamental metric for evaluating investment property performance regardless of financing.

Annual rental income after all operating expenses as a percentage of purchase price. More meaningful than gross yield for investment decisions — it reflects what actually lands in your pocket before financing costs.

The four components of a monthly mortgage payment. Lenders use total PITI when calculating your front-end DTI ratio. PMI and HOA fees are sometimes added making it PITIA.

Insurance required on conventional loans when the down payment is under 20%. Protects the lender — not the borrower — against default. Automatically cancelled by law when the loan reaches 78% LTV; can be requested at 80% LTV.

Upfront fees paid to a lender to reduce the interest rate. One point = 1% of the loan amount and typically reduces the rate by 0.25%. Worth paying if you plan to stay long enough for the monthly savings to exceed the upfront cost.

A lender's conditional commitment to loan a specific amount based on verified income, assets, and credit. Stronger than pre-qualification. Required by most sellers before accepting an offer in competitive markets.

The fee paid to real estate agents for their services. Historically 5–6% of the sale price split between buyer and seller agents, paid by the seller. The 2024 NAR settlement changed how buyer agent compensation is negotiated — buyers must now sign a buyer representation agreement disclosing compensation.

A quick screening rule: if monthly rent equals at least 1% of the purchase price, the property may cash flow. A useful first filter, not a complete analysis. Markets with high appreciation (NYC, SF, LA) rarely meet this threshold.

The annual return expressed as a percentage of total investment. For rental properties, typically measured as cash-on-cash ROI (cash flow ÷ cash invested) or total ROI including equity buildup and appreciation.

A calculation showing how your monthly payment and DTI would change if interest rates increase. Most relevant for ARM borrowers facing rate resets. Our calculator applies a configurable rate buffer (default +2%) to show worst-case DTI.

A one-time premium paid at closing to protect against defects in the property's title — unpaid liens, ownership disputes, or recording errors. Lenders require a lender's policy; an owner's policy protects you and is strongly recommended.

A tax imposed by state or local government on the transfer of real property. Varies widely by state — some have none (Texas, Wyoming), others are significant (New York, Pennsylvania, Delaware). Usually paid by the seller but negotiable.

A mortgage guaranteed by the US Department of Veterans Affairs, available to eligible veterans, active-duty service members, and surviving spouses. No down payment required, no PMI, and typically lower rates than conventional. A funding fee applies instead of MIP.

The percentage of time a rental property is unoccupied and not generating income. Used in NOI calculations to produce realistic cash flow projections. National average is around 5–8%; use local market data for accuracy.