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What Is Capital Gains Tax? Capital gains tax is the tax you may owe when you sell an asset for more than you paid for it. The IRS considers many things you own to be capital assets, including stocks, bonds, real estate, and other investments. Your capital gain is generally the difference between what you received when you sold the asset and your adjusted cost basis in that asset. Here’s a simple example: Suppose you purchase $10,000 worth of stock...

If you own a home, rental property, commercial building, or land, property taxes are one of those expenses that never really go away. Even after the mortgage is completely paid off, the property tax bill keeps coming. Understanding property taxes is important because they directly affect the true cost of owning real estate. What Is Property Tax? Property tax is a tax charged by local governments based primarily on the assessed value of real estate you own.

What Is Sales Tax? Sales tax is a tax charged on the purchase of certain goods and services. The business collects the tax from the customer at the time of the sale and then sends that money to the appropriate state or local government. For example, suppose you purchase a television for $1,000 and the applicable sales tax rate is 8%. Your sales tax would be: $1,000 × 8% = $80 Your total cost would be: $1,080 The store doesn't normally keep that additional $80...

Definition of Income Tax Income tax is a tax imposed by federal, state, and sometimes local governments on the income earned by individuals and businesses. If you earn money, there is a good chance that income tax is going to be part of the equation. For employees, income taxes are usually withheld from each paycheck throughout the year...

What Is a Tax? A tax is money collected by a government to pay for public services and programs. Taxes help fund things such as roads, schools, police and fire departments, national defense, government operations, and Social Security and Medicare. Taxes come in many different forms. You may pay income tax on money you earn. You pay sales tax when you purchase certain goods and services. Homeowners typically pay property taxes. Employees see payroll taxes deducted from thei

Definition of Collections Nobody likes seeing the word collections attached to their name. In the financial world, collections refers to the process of attempting to recover money that someone owes but has failed to pay on time. If a debt remains unpaid long enough, the original creditor may turn the account over to an internal collections department or hire or sell the debt to a third-party collection agency.

What Does “Default” Mean? A default happens when a borrower fails to meet the terms of a loan or other financial obligation. Most commonly, this means failing to make required payments. If you borrow money for a house, car, credit card, student loan, or personal loan, you agree to repay that money according to certain terms. When you fail to meet those obligations for an extended period of time, the lender may consider the loan to be in default.

Nobody wants to see the word garnishment on a letter from an employer, creditor, or court. But understanding garnishment and how it happens can help you recognize financial trouble early and take action before someone else starts making decisions about your paycheck. What Does Garnishment Mean? Garnishment is a legal process that allows money you owe to be taken directly from your wages, bank account, or other income to satisfy a debt. The most familiar example is wage ga

Bankruptcy is one of those financial words nobody really wants to use when talking about their own money. But understanding what it means—and how it works—is an important part of becoming financially savvy. What Does Bankruptcy Mean? Bankruptcy is a legal process that allows individuals or businesses that cannot repay their debts to seek relief from some or all of those financial obligations. Bankruptcy doesn’t simply mean someone “ran out of money.”

What Does Foreclosure Mean? Foreclosure is the legal process a lender can use to take possession of a property when the borrower fails to make the required mortgage payments. When you borrow money to purchase a home, the property serves as collateral for the loan. You get to live in and own the home, but the lender has a financial claim against the property until the mortgage is paid off.

What Does Underwriting Mean? Underwriting is the process a lender, insurance company, or financial institution uses to evaluate risk before approving a loan, issuing an insurance policy, or making an investment. In plain English, underwriting is financial detective work. Before a company puts its money—or its financial reputation—on the line, it wants to understand what could go wrong and whether the potential reward is worth the risk.

What Is an Appraisal? An appraisal is a professional estimate of the value of an asset—most commonly real estate. When you buy a home using a mortgage, the lender typically orders an appraisal to determine whether the property is worth approximately what you’ve agreed to pay for it. Why does the lender care? Because the house serves as collateral for the loan. If you stop making your mortgage payments, the lender may eventually need to sell the property to recover its mone

What Is Private Mortgage Insurance (PMI)? Private Mortgage Insurance (PMI) is insurance that may be required by a mortgage lender when you purchase a home using a conventional loan and make a down payment of less than 20% of the home’s purchase price. The reason is simple: the smaller your down payment, the more money the lender is risking. PMI helps reduce that risk. For example, suppose you purchase a $400,000 home and put down 10%, or $40,000. You would need to borrow $

What Does Escrow Mean? Escrow is an arrangement where money, documents, or other assets are held by a neutral third party until certain conditions of a transaction are met. Think of escrow as a financial middleman. The buyer doesn’t want to hand over money until the seller fulfills their obligations. The seller doesn’t want to complete the transaction without knowing the buyer has the money. Escrow sits safely in the middle until everyone does what they agreed to do.

What Is Title Insurance? Title insurance is an insurance policy that protects against financial losses caused by problems with the legal ownership, or title, of a piece of real estate. When you buy a home, rental property, land, or commercial property, you’re not just buying the building. You’re acquiring the legal rights to that property. Before closing, a title company typically performs a title search to examine public records...

What Are Closing Costs? Closing costs are the fees and expenses you pay when completing a real estate transaction, in addition to the purchase price of the property. Think of them as the cost of getting the deal across the finish line. When you purchase a home, several people and companies may be involved in making the transaction happen. There may be a lender, title company, appraiser, insurance company, government agencies, attorneys, and others.

What Is a Down Payment? A down payment is the amount of money you pay upfront when purchasing something with financing. Instead of borrowing 100% of the purchase price, you contribute some of your own money and borrow the rest. For example, imagine you purchase a home for $300,000 and make a 20% down payment. Your down payment would be: $300,000 × 20% = $60,000 That means you would need to finance the remaining $240,000.

What Is an Installment? An installment is one of a series of scheduled payments used to repay a debt or complete the purchase of something over time. Instead of paying the entire amount upfront, you divide what you owe into smaller payments—usually made weekly, monthly, quarterly, or annually. For example, suppose you borrow $20,000 to purchase a car and agree to repay the loan over five years. Rather than paying $20,000 immediately, you make monthly installments over thos

What Is a Balloon Payment? A balloon payment is a large, lump-sum payment due at the end of a loan term. With a traditional fully amortizing loan, your monthly payments are calculated so that the entire loan balance is gradually paid off by the end of the loan. With a balloon loan, your regular payments may be calculated using a longer repayment schedule, but the actual loan term ends much sooner. The remaining balance then becomes due all at once...

What Is an Adjustable-Rate Mortgage (ARM)? An Adjustable-Rate Mortgage (ARM) is a home loan with an interest rate that can change over time. Unlike a fixed-rate mortgage, where your interest rate stays the same for the life of the loan, an ARM typically begins with a fixed introductory rate for a certain number of years. After that introductory period ends, the interest rate adjusts periodically based on market conditions and the terms of the loan.