Real Estate Finance Glossary

These definitions explain the vocabulary behind the Rent vs Buy Calculator and the rest of the site. Each entry is written to stand on its own, so you can read just the term you need. Where a calculator puts a concept into practice, we link to it. For the full model behind these numbers, see the methodology.

Terms A to Z

Amortization

Amortization is the process of paying off a loan through fixed, regular payments that cover both interest and principal. Early payments are mostly interest; over time more of each payment goes to principal, so your balance falls faster near the end. You can see this split month by month in the amortization schedule.

Appreciation

Appreciation is the increase in a property's market value over time. It is usually quoted as an annual percentage, such as a long-run assumption of about 3 percent per year, though actual results vary widely by location and period. Appreciation builds equity for owners, but it is an assumption, not a guarantee, and prices can also fall.

APR vs interest rate

The interest rate is the cost of borrowing the loan principal, expressed as a yearly percentage. The annual percentage rate (APR) is broader: it folds certain lender fees and points into a single yearly rate, so it is usually a bit higher than the note rate. APR helps you compare offers on a more like-for-like basis, while the interest rate drives your monthly payment in the mortgage calculator.

Break-even horizon

The break-even horizon is the point in time at which buying a home leaves you no worse off than renting and investing the difference. Before that horizon, renting usually comes out ahead because of large upfront and selling costs; after it, buying tends to pull ahead. The Rent vs Buy Calculator reports this horizon, and the break-even guide explains how to read it.

Closing costs

Closing costs are the one-time fees paid to complete a home purchase, on top of the down payment. They commonly include lender, title, appraisal, and recording fees and often run in the range of 2 to 5 percent of the purchase price. Estimate yours with the closing cost estimator.

Debt-to-income (DTI)

Debt-to-income, or DTI, is the share of your gross monthly income that goes toward debt payments, expressed as a percentage. Lenders use it to judge how much mortgage you can handle, often looking for a total DTI at or below the mid-30s to low-40s percent range. See where you stand with the affordability calculator.

Down payment

The down payment is the cash you pay upfront toward a home's price, with the rest covered by your mortgage. A larger down payment lowers your loan amount and monthly payment and can remove the need for mortgage insurance. The down payment calculator shows how different amounts change your loan.

Equity

Equity is the part of your home you actually own: its current market value minus the balance you still owe on the mortgage. It grows as you pay down principal and as the home appreciates, and it shrinks if values fall. Equity is the wealth a buyer accumulates, but it is not cash until you sell or borrow against it.

Escrow

Escrow is a holding arrangement managed by a neutral third party. During a purchase it holds funds and documents until the deal closes; with a mortgage, an escrow account collects part of your monthly payment to pay property tax and home insurance on your behalf. Escrow does not add to your total cost, but it does bundle those bills into your payment.

Fixed-rate mortgage

A fixed-rate mortgage keeps the same interest rate for the entire loan term, so your principal-and-interest payment never changes. This makes budgeting predictable and protects you if rates rise, though you would need to refinance to benefit if rates fall. It is the loan type our mortgage calculator models by default.

HOA fee

A homeowners association (HOA) fee is a recurring charge paid by owners in certain communities, condos, or planned developments. It funds shared upkeep such as landscaping, amenities, and common-area repairs, and it is separate from your mortgage, tax, and insurance. HOA fees can rise over time and are a real ownership cost worth including in any rent-vs-buy comparison.

Home insurance

Home insurance (homeowners insurance) protects your property and belongings against covered events such as fire, storms, and theft, and includes liability coverage. Lenders require it while you have a mortgage, and the premium is often paid monthly through escrow. It is a recurring ownership cost that a renter typically does not carry, aside from cheaper renters insurance.

Inflation

Inflation is the general rise in prices over time, which reduces the buying power of a fixed amount of money. In a rent-vs-buy comparison it matters because rents, maintenance, taxes, and insurance tend to grow roughly with inflation, while a fixed mortgage payment stays the same in nominal terms. Our model lets you set an inflation assumption to grow recurring costs.

Interest

Interest is the cost a lender charges for letting you borrow money, calculated as a percentage of the outstanding balance. On a mortgage it is largest early on, when the balance is high, and shrinks as you pay down principal. The interest portion of each payment is shown line by line in the amortization schedule.

LTV (loan-to-value)

Loan-to-value, or LTV, is the size of your mortgage divided by the home's value, shown as a percentage. A 20 percent down payment, for example, means an 80 percent LTV. Lower LTV signals less risk to lenders and is the threshold at which private mortgage insurance can usually be removed.

Maintenance reserve

A maintenance reserve is money an owner sets aside for upkeep and repairs, from routine servicing to roof or appliance replacement. A common rule of thumb budgets about 1 percent of the home's value per year, though older homes can cost more. Because renters generally do not pay this, it is an important cost to include in any honest comparison.

Marginal tax rate

Your marginal tax rate is the percentage of tax you pay on your next dollar of income, based on your top tax bracket. It matters for buying because it sets the value of any mortgage-interest and property-tax deductions: a deduction saves you roughly your marginal rate times the deductible amount. The benefit only applies if you itemize instead of taking the standard deduction.

Mortgage

A mortgage is a loan used to buy a home, secured by the property itself, which the lender can claim if you stop paying. You repay it over a set term through regular payments of principal and interest, plus often tax and insurance. The mortgage calculator estimates the monthly payment for a given price, down payment, rate, and term.

Opportunity cost

Opportunity cost is the return you give up by using money one way instead of another. In rent-vs-buy, the classic example is the down payment and closing costs: cash tied up in a home could otherwise be invested. Our model captures this by having the renter invest the difference, and the opportunity-cost guide explains why it can change the answer.

PITI

PITI stands for principal, interest, taxes, and insurance: the four parts that make up a typical monthly mortgage payment. Principal and interest repay the loan, while taxes and insurance are often collected through escrow. Lenders look at your full PITI, not just principal and interest, when judging affordability.

PMI (private mortgage insurance)

Private mortgage insurance, or PMI, is an extra monthly charge lenders require when your down payment is below 20 percent (an LTV above 80 percent). It protects the lender, not you, and can usually be removed once you reach about 20 to 22 percent equity. The mortgage calculator factors PMI into the payment until that equity threshold is met.

Principal

Principal is the amount you actually borrowed, separate from the interest charged on it. Each mortgage payment splits between interest and a principal portion, and paying down principal is what builds your equity. Extra payments applied to principal shorten the loan and cut total interest, as the amortization schedule can illustrate.

Property tax

Property tax is a recurring tax charged by local governments based on your home's assessed value, typically a percentage paid each year. Rates vary widely by location, often falling somewhere between roughly 0.5 and 2.5 percent of value. It is usually collected through escrow and is a continuing cost that, unlike a mortgage, does not end when the loan is paid off.

Rent growth

Rent growth is the rate at which rent rises over time, usually quoted as an annual percentage. Over the long run it tends to track inflation, though local markets can move faster or slower. It is a key rent-vs-buy assumption: faster rent growth makes a fixed mortgage payment look better by comparison, which you can test in the Rent vs Buy Calculator.

Selling costs

Selling costs are the expenses an owner pays when selling a home, including agent commissions, transfer taxes, and various closing fees. Together they often total around 6 to 8 percent of the sale price and are deducted from your proceeds. Because they are large and one-time, they push the break-even horizon for buying further out, as covered in the closing-and-selling-costs guide.

Standard deduction

The standard deduction is a fixed amount you can subtract from taxable income without itemizing individual deductions. It matters for buyers because mortgage interest and property tax only reduce your taxes if your itemized total is larger than the standard deduction. For many households the standard deduction is higher, which means the tax benefit of owning is smaller than often assumed.

Term

The term is the length of time over which you repay a mortgage, commonly 15 or 30 years. A longer term lowers the monthly payment but raises total interest paid; a shorter term does the opposite. You can compare how different terms change the payment and interest in the mortgage calculator.

Transfer tax

A transfer tax is a one-time tax some state or local governments charge when property changes ownership, usually a percentage of the sale price. Depending on local rules, it may be paid by the buyer, the seller, or split between them. Where it applies, it is part of closing or selling costs and should be counted in a full rent-vs-buy comparison.

Underwater (negative equity)

A home is underwater, or in negative equity, when you owe more on the mortgage than the property is currently worth. This can happen if prices fall or if you bought with a very small down payment and have not built equity yet. Being underwater makes it costly to sell, since the sale would not cover the remaining loan, and it is a risk worth weighing before buying with little margin.

Still have a question?

If a term you need is not here, the methodology page defines how each input feeds the model, and the rent vs buy guide walks through the bigger decision. You can also contact us with a suggestion for a definition to add.