Finance glossary

ARV is a forward-looking estimate: not what a property is worth today, but what it should sell for after the rehab is finished. It is usually derived from comparable sales of similar, already-renovated homes in the same area, which makes the quality of those comparables the main driver of accuracy.

ARV anchors the core math of a flip. A common guideline, the 70 percent rule, says an investor should pay no more than about 70 percent of ARV minus repair costs, leaving room for holding costs, selling costs, and profit. Because the entire deal is built on a projected number, an over-optimistic ARV is one of the most common ways a flip loses money, so conservative, well-supported estimates matter. ARV is an industry convention, not a regulated appraisal standard.

On an amortizing loan your monthly payment stays level, but the split between interest and principal shifts over time. Early on, the balance is large, so most of the payment goes to interest and only a little to principal. As the balance shrinks, the interest charge shrinks with it, and more of each payment goes toward principal.

This is why the early years of a 30-year mortgage build equity slowly, and why paying extra principal early saves the most interest: every dollar of principal you remove stops accruing interest for the rest of the term. An amortization schedule lists each payment and shows exactly how the interest and principal split changes month by month.

The interest rate is the cost of borrowing the principal alone. APR is broader: it also reflects points, origination fees, and other lender charges, then spreads them across the life of the loan as a single annual percentage. That makes APR a more complete measure of what a loan actually costs.

Two offers can share the same interest rate but have different APRs because one charges more upfront fees. Comparing APRs helps you see past a low headline rate. The catch is that APR assumes you keep the loan for its full term, so if you expect to sell or refinance early, the upfront fees weigh more heavily than the APR suggests.

Break-even analysis weighs an upfront cost against the stream of benefits it produces over time, and finds the moment the two cancel out. After that point, you are ahead; before it, you have not yet recovered what you spent.

In a refinance, the upfront cost is the closing costs and the benefit is the reduction in your monthly payment. Dividing the closing costs by the monthly saving gives the number of months to break even. If you expect to keep the home and the loan past that point, the refinance tends to pay off; if you might sell or refinance again sooner, it may not. The same logic applies to a rent-versus-buy decision, where the upfront costs of buying take a number of years of ownership to recover, which is why a short expected stay often favors renting.

Cap rate answers a simple question: if you bought a property outright with cash, what annual return would its operations produce? You take the net operating income (rental income minus operating expenses, before any mortgage) and divide it by the property’s value.

Because it ignores financing, cap rate isolates the quality of the asset itself, which makes it useful for comparing one property to another or one market to another. A higher cap rate generally means a higher return but often more risk or a weaker location; a lower cap rate usually signals a premium, stable market. Cap rate is an industry convention rather than a regulated term, so always confirm how income and expenses were defined before comparing two quoted figures.

Cash-on-cash return measures how hard your own cash is working, after the mortgage is taken into account. The numerator is annual cash flow: rental income minus operating expenses and minus the loan payments. The denominator is the total cash you actually invested, typically the down payment plus closing costs and any upfront repairs.

Because it includes leverage, cash-on-cash can be much higher or lower than the cap rate on the same property. A loan that costs less than the property’s unleveraged return amplifies your cash-on-cash; an expensive loan drags it down. It is a single-year, pre-tax snapshot, so it does not capture appreciation, principal paydown, or tax effects, which is why investors pair it with other measures of total return.

Simple interest is paid only on the original principal. Compound interest is paid on the principal plus all the interest accumulated so far, so the balance grows on itself. The effect starts small and accelerates: the longer the money compounds, the larger the share of the final balance that comes from interest rather than your own contributions.

Two factors drive the outcome. The first is time, since the most dramatic growth happens in the later years when the balance is largest. The second is compounding frequency, because interest that is added monthly starts earning sooner than interest added once a year. The same force works against you on debt that compounds, such as an unpaid credit card balance, where interest charged on interest makes the amount owed climb.

Lenders look at two versions of DTI. The front-end ratio counts only housing costs (your full PITI payment) against gross income. The back-end ratio adds all other recurring debt: car loans, student loans, credit card minimums, and the like. The back-end ratio is the one most mortgage underwriting focuses on.

Many lenders prefer a back-end DTI at or below 43 percent, though limits vary by loan type and other strengths in your file. Because DTI uses gross income, it does not reflect taxes, retirement contributions, or everyday expenses, so a loan that fits the ratio can still feel tight in practice. Lowering DTI means either paying down debt or raising income before you apply.

A HELOC is a revolving line secured by your home equity, and its life splits into two distinct stages. The draw period, commonly around 10 years, is when you can borrow, repay, and borrow again up to your limit. Many HELOCs allow interest-only payments during this stage, which keeps the monthly cost low but does nothing to reduce the principal.

When the draw period ends, the repayment period begins, often lasting 20 years. You can no longer draw on the line, and your payments now include principal as well as interest, so they can jump sharply, especially if you only made interest payments before. HELOC rates are usually variable, so the payment can also move with interest rates. Understanding where you are in these two phases is essential to avoiding a payment shock at the transition.

Equity is your ownership stake in the home, measured in dollars. If a house is worth 400,000 and the mortgage balance is 250,000, you have 150,000 in equity. It builds in two ways: the principal portion of each mortgage payment lowers what you owe, and any rise in the property’s market value increases the gap between value and debt. A market decline can shrink equity, and it can briefly go negative if you owe more than the home is worth.

Equity matters beyond ownership pride. It is what you can tap with a home equity loan or a HELOC, it determines your proceeds when you sell, and it is the mirror image of your loan-to-value ratio: as equity rises, LTV falls, which is also what lets you drop private mortgage insurance.

LTV measures how much of a property is financed versus owned outright. A larger down payment means a lower LTV, which lenders read as lower risk because there is more equity cushioning the loan if values fall.

The 80 percent threshold matters most. On a conventional mortgage, an LTV above 80 percent (a down payment under 20 percent) usually triggers private mortgage insurance, and you can typically request its removal once the LTV drops back to 80 percent. LTV also sets borrowing limits on cash-out refinances and home equity lines, where lenders cap the combined loan-to-value they will allow against the home.

NOI strips a property down to its operating performance. You start with effective gross income (rent collected, adjusted for vacancy) and subtract operating expenses such as property taxes, insurance, management, maintenance, and utilities the owner pays. What you deliberately leave out is just as important: NOI excludes mortgage principal and interest, income taxes, depreciation, and large capital improvements.

Holding financing out is what makes NOI comparable across properties regardless of how each is funded, and it is the income figure that feeds the cap rate. The categories of deductible operating expenses for a rental align with those described in IRS Publication 527, though NOI is an investment metric rather than a tax figure, so the two are calculated for different purposes.

PITI is the standard way lenders describe a housing payment because it captures every recurring cost the loan carries, not only the loan itself. The four parts are:

• Principal: the portion that pays down the amount you borrowed.
• Interest: the cost of borrowing, charged on the remaining balance.
• Taxes: property taxes, usually collected monthly into an escrow account and paid on your behalf.
• Insurance: homeowners insurance, plus private mortgage insurance (PMI) when your down payment is under 20 percent.

When an affordability rule talks about your payment being a share of income, it almost always means PITI, sometimes with HOA dues added. That is why two loans with the same principal and interest can still be very different to carry once taxes and insurance are included.

Principal means slightly different things depending on context, but the core idea is the same: it is the base amount that interest acts on. When you borrow, the principal is the amount lent to you, and your remaining principal is the outstanding balance that still accrues interest. When you save or invest, the principal is the money you put in, before any returns.

On an amortizing loan, each monthly payment is split between interest on the current balance and a principal portion that reduces what you owe. Paying extra principal directly shrinks the balance, which lowers all future interest because interest is only ever charged on the principal that remains. Keeping principal and interest separate in your mind is the key to understanding how loans and compounding actually work.

When you put down less than 20 percent on a conventional mortgage, the lender faces more risk, so it requires private mortgage insurance to cover potential losses if you default. PMI is a real cost to you, often a few hundred dollars a month, but it buys the lender protection, not you.

The upside is that PMI is not permanent. As you pay down the balance and the home builds equity, your loan-to-value ratio falls. You can generally request PMI cancellation at 80 percent LTV, and under federal rules lenders must automatically end it at 78 percent of the original value, provided you are current on payments. Government-backed loans such as FHA use a different mortgage insurance structure with its own rules.

The idea behind a safe withdrawal rate is to turn a portfolio into a sustainable paycheck. You withdraw a set percentage of the starting balance in year one, then increase that dollar amount by inflation each year regardless of how the markets move. The question the research asks is how high that starting percentage can be before historical sequences of returns would have exhausted the money too soon.

The 4 percent figure comes from the Trinity study and related work, which tested withdrawal rates against historical U.S. stock and bond returns over 30-year retirements. It is a planning guideline, not a guarantee: results depend on your time horizon, asset mix, fees, and the order in which good and bad return years arrive. Many planners treat 4 percent as a starting reference and adjust up or down for their own situation.