Word of the day (WOD) is: underwater

Definition: Underwater is a financial term more commonly known as negative equity. Negative equity means that the value of a loan for a particular asset exceeds the value of the asset.

Common Use: This term is most often used when discussing the housing market. If you’ve just crawled out from a two year stint under a rock, the housing market has been tanking. What this means is that many people who purchased a home are now finding themselves paying back a loan that well exceeds the value of their house. This term is also used when talking about buying  a new car, where the vehicle is worth “30% less” as soon as you leave the lot.

Sentence: Can you believe what’s going on with this economy? I looked up my house value on Zillow and it’s worth $40k less than what I paid for it last summer. My house is underwater and if the value drops much more I might have to look into foreclosure.

The Word of the Day is: Ponzi Scheme

Definition: A Ponzi Scheme is an investment “opportunity” that pays returns to an investor  by using their own money or buy using the money from other investors. The returns are not based on an actual investment or performance. Ponzi schemes usually offer higher rates of return or more consistent returns than conventional investments. The scheme ultimately collapses when authorities step in or too many investors begin to pull out their so called “earnings.” The scheme is named after Charles Ponzi.

Common uses: Ponzi schemes are an elaborate hustle, praying on greed and ignorance. These are most likely to occur in both economic booms and bubbles. Either people get duped into jumping on the band wagon or trying to find ways to manipulate the current downturns. The scheme operator hooks investors with short term returns at an incredible rate, and then hooks them for big and better returns for money held for longer periods. Recently there have been two huge ponzi schemes uncovered, involving what appeared to be legitimate businessmen – Bernie Madoff and R. Allen Stanford.

Sentence: Remember that guy I told you about who was able to take my $1000 and turn it into $3000 in just a month? Turns out he was running a ponzi scheme and now I’m out $5000 I gave him last week. I sure learned my lesson about if something sounds too good to be true, it probably is.

The word of the day is: Amortization schedule

Definition: Amoritization schedule is a list of your mortgage payments month over month, year over year. This list is broken down by interest paid, principal paid, mortgage amount, and remaining balance. The list of payments goes from the beginning of the payments till the amount due is zero.

Common uses: Amortization schedules are used to show a detailed breakdown of your mortgage payments. This is very valuable to help you understand what exactly is involved in having a mortgage. Maybe if more people in the mid 2000’s understood amortization schedules, we wouldn’t be having such financial woes.

Sentence: I was looking at my amortization schedule for my current house and realized I’m going to be paying more every month in interest than the principal until I am 20 years into my 30 year mortgage.

The more you know.