Key definitions

5/1 ARM: A 5/1 ARM is an adjustable-rate mortgage (ARM) that has an initial interest rate for five years, and thereafter has an adjustment interval of one year. The adjustment is based on (or “indexed to”) another rate -- often the yield on a Treasury note.

Closing Costs: Expenses incurred by buyers and sellers when transferring ownership of property. Closing costs include lender fees, title charges, government recording fees, escrow and pre-paid items.

Points: A point equals 1 percent of a mortgage or other loan. Some lenders charge “origination points” to cover expenses of making a loan. Some borrowers pay “discount points” to reduce the loan’s interest rate.

Amortization: The payment of a debt in installments over an agreed-upon period, during which principal and interest are paid off.

APR: Annual Percentage Rate. A yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans.

Fixed: The payment of a debt in installments over an agreed-upon period, during which principal and interest are paid off.

Term: The time to the maturity of a loan or deposit, expressed in months or years.