Feeling overwhelmed by financial talk? You're not alone. Financial terms can sound like a foreign language, but understanding them is the first step to building a secure future. At Houston Police Credit Union, we believe becoming financially savvy shouldn't be a secret. That's why we've put together a list of 10 financial terms you need to master to take control of your finances.

1. APR vs APY

  • APR (Annual Percentage Rate): The yearly cost of a loan or credit card, expressed as a percentage. It's simply the cost of borrowing money.
  • APY (Annual Percentage Yield): The rate of return you earn on an investment or savings account.

*A higher APY is always better for savings, while a lower APR is better for loans.

2. LTV (Loan To Value)

  • The ratio that lenders use to assess the risk of a loan, comparing the loan amount to the property's appraised value. For example, if you're buying a home worth $300,000 and you get a loan for $240,000, your LTV is 80% ($240,000 / $300,000). 

3. Equity

  • Think of this as is the value of ownership in an asset after any debts or liabilities are paid off. For a house, your equity is the market value of the home minus the amount you still owe on your mortgage. For example, as you pay down your loan and your home's value increases, your equity grows.

4. Gross Income vs Net Income 

  • Gross Income: Your total pay before any deductions are taken out. This includes your salary, wages, bonuses, and any other income sources.

  • Net Income: The amount of money you take home after all deductions, such as taxes, Social Security, 401(k) contributions, and health insurance premiums, are subtracted.

5. EFT (Electronic Funds Transfer)

  • This is any transfer of money from one bank account to another that happens electronically. This includes direct deposit of your paycheck, ATM withdrawals, online bill payments, and wire transfers.

6. Principal

  • The initial amount of money you borrow on a loan or the initial amount you invest. When you make a loan payment, a portion goes toward the interest, and the rest goes toward reducing your principal. Paying down the principal is what ultimately gets you out of debt.

7. DTI (Debt To Income)

  • A financial metric that compares your total monthly debt payments to your gross monthly income, expressed as a percentage. Lenders use this ratio to measure your ability to manage monthly payments and repay the money you plan to borrow. A low DTI indicates that you have a good balance between your income and your debt, making you a less risky borrower.

8. Appraisal

  • A written professional opinion of a property or item's value, often required by lenders for mortgages to ensure the property is worth the loan amount. A lender uses an appraisal not only to assess the value of the property, but also to determine such things as your interest rate, required down payment, and whether you will be approved for the loan.

9. Investment

  • An investment is putting your money into something, like stocks, bonds, or real estate, with the expectation that it will grow in value over time and generate a profit. It's essentially using your money to buy an asset that you believe will become worth more in the future, allowing you to "make your money grow". 

10. IRA (Individual Retirement Account)

  •  An investment account that helps you save for retirement through yearly contributions while offering tax advantages.

Interested in becoming a financial expert? To continue your journey, be sure to visit our other blogs for more tips, insights, and helpful information.