Essential Financing Terms
Understanding financing terminology helps you communicate effectively with lenders and make informed decisions.
A-D
Amortization
The process of paying off a loan through regular principal and interest payments over time.
Bridge Loan
Short-term financing used to "bridge" the gap between a current need and longer-term financing.
Cap Rate (Capitalization Rate)
The ratio of Net Operating Income to property value, used to estimate return on investment.
DSCR (Debt Service Coverage Ratio)
The ratio of Net Operating Income to annual debt payments. A DSCR of 1.25x means NOI is 25% higher than debt service.
E-L
Equity
The difference between property value and loan balance; the owner's stake in the property.
Fix and Flip
Investment strategy of purchasing, renovating, and selling properties for profit.
Hard Money
Short-term, asset-based loans typically used for real estate investment.
LTV (Loan-to-Value)
The ratio of loan amount to property value, expressed as a percentage.
M-R
NOI (Net Operating Income)
Property income minus operating expenses, before debt service and capital expenditures.
Points
Upfront fees charged by lenders, where one point equals 1% of the loan amount.
Prepayment Penalty
A fee charged for paying off a loan before its scheduled maturity date.
Rate and Term Refinance
Refinancing to change the interest rate and/or loan term without taking cash out.
S-Z
SBA Loan
Government-backed small business loans with favorable terms.
Term Loan
A loan with a fixed repayment schedule over a specific period.
Underwriting
The process lenders use to evaluate loan applications and assess risk.
Working Capital
Funds available for day-to-day business operations.
Have Questions?
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