Glossary
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EquityIn housing markets, equity is the difference between the fair market value of the home and the outstanding balance on your mortgage plus any outstanding home equity loans. In vehicle leasing markets, equity is the positive difference between the trade-in or market value of your vehicle and the loan payoff amount.
Hybrid ARM
These ARMs are a mix--or a hybrid--of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first several years of the loan; after that period, the rate can adjust annually. For example, hybrid ARMs can be advertised as 3/1 or 5/1--the first number tells you how long the fixed interest-rate period will be and the second number tells you how often the rate will adjust after the initial period. For example, a 3/1 loan has a fixed rate for the first 3 years and then the rate adjusts once each year beginning in year 4.
Rent vs Buy
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Index
The economic indicator used to calculate interest-rate adjustments for adjustable-rate mortgages or other adjustable-rate loans. The index rate can increase or decrease at any time. See the chart
Selected index rates for ARMs over an 11-year period,
for examples of common indexes that have changed in the past.
Interest
The rate used to determine the cost of borrowing money, usually stated as a percentage and as an annual rate.
Interest-only (I-O) ARM
Interest-only ARMs allow you to pay only the interest for a specified number of years, typically between 3 and 10 years. This arrangement allows you to have smaller monthly payments for a prescribed period. After that period, your monthly payment will increase--even if interest rates stay the same--because you must start paying back the principal and the interest each month. For some I-O loans, the interest rate adjusts during the I-O period as well.