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Refinancing Terms

Refinancing Terms

If you are in the market looking for refinancing options on your home mortgage, it is important to familiarize yourself with the terms commonly used. Poring over boring mortgage textbooks is not required. Here’s a look at the basic refinancing lingo to get you started.

APR:

Different lenders calculate the APR or the Annual Percentage Rate in different ways. Essentially the APR is the true calculation of the yearly interest rate that is chargeable to the homeowners after taking into account all the lender’s closing costs.

ARM or Adjustable-rate mortgage:

An ARM is a mortgage whose interest rate changes periodically. The interest rate in such a mortgage is tied in to an index or benchmark using treasury bills or any other such economic indicators. ARMs typically offer varied terms and very low initial interest rates so that the offer is attractive.

FRM or Fixed-rate mortgage:

A Fixed-rate mortgage is a mortgage whose interest rate remains constant throughout the duration of the loan. The interest rate is “locked-in” at the time of the agreement between the lender and the home-owner and does not fluctuate with the market rates. This usually provides security and predictability to the home owner.

Good Faith Estimate:

A Good Faith Estimate is a detailed document that the lender must provide the homeowner listing all the closing costs chargeable on your loan. This is a mandatory requirement from lenders.

LTV Ratio or Loan-to-value ratio:

LTV is the ratio of the loan amount on your home to the home’s appraised value, expressed in terms of percentage. “LTV ratio = Percentage of (Loan amount/appraised value)”. If your LTV is high you will run the risk of attracting a higher interest rate or may need a private insurance on the mortgage.

Points:

A mortgage point is one percent of your total mortgage value. For instance, if you have a $100,000 mortgage, a point would be one percent of $100,000 which is $1,000.

Term:

Term refers to the duration of your mortgage or the period over which you have agreed to repay your loan. The typical mortgage term is between 15 and 30 years.

Third party fees:

Vendors like title companies and appraisers, charge fees for evaluating the quality of your loan, so that the lender can use this assessment in making an offer.

These are the basic, most commonly used terms in the context of mortgage loans. Study these basics and you are equipped to understand the lender’s offer better and take the right refinancing decision that suits your requirements.

 

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