Personal Finance For Dummies, 7th Edition

Glossary

adjustable-rate mortgage (ARM): A mortgage whose interest rate and monthly payments vary throughout its life. ARMs typically start with an artificially low interest rate that gradually rises over time. The interest rate is determined by a formula: margin (which is a fixed number) plus index (which varies). Generally speaking, if the overall level of interest rates drops, as measured by a variety of different indexes, the interest rate of your ARM generally follows suit. Similarly, if interest rates rise, so does your mortgage’s interest rate and monthly payment. Caps limit the amount that the interest rate can fluctuate. Before you agree to an ARM, be certain that you can afford its highest possible payments.

adjusted cost basis: For capital gains tax purposes, the adjusted cost basis is how the IRS determines your profit or loss when you sell an asset such as a home or a security. For an investment such as a mutual fund or stock, your cost basis is what you originally invested plus any reinvested money. For a home, you arrive at the adjusted cost basis by adding the original purchase price to the cost of any capital improvements (expenditures that increase your property’s value and life expectancy).

adjusted gross income (AGI): The sum of your taxable income (such as wages, salaries, and tips) and taxable interest less allowable adjustments (such as retirement account contributions and moving expenses). AGI is calculated before subtracting your personal exemptions and ...