Mortgage Glossary
Refinance
Refinancing is the process of replacing your existing mortgage with a new one, typically to obtain a lower interest rate, change your loan term, or access home equity. A rate-and-term refinance adjusts your rate or repayment period, while a cash-out refinance lets you borrow against your equity and receive the difference in cash. Refinancing involves closing costs similar to your original mortgage, so it is important to calculate your break-even point to determine if it makes financial sense.
Related Terms
Interest Rate
The interest rate is the cost of borrowing money for your mortgage, expressed as a percentage of the loan amount charged annually. Your rate is determined by factors including your credit score, down payment, loan type, loan term, and current market conditions. Even a small difference in rate can significantly impact total cost over the life of the loan. For example, a 0.5 percent reduction on a $400,000 mortgage can save over $40,000 in interest over 30 years.
Equity
Home equity is the difference between your home's current market value and the amount you still owe on your mortgage. As you make payments and your home appreciates in value, your equity grows. Equity can be accessed through a cash-out refinance or home equity loan, and it serves as a key measure of your financial stake in the property. Building equity is one of the primary wealth-building benefits of homeownership.
Closing Costs
Closing costs are the fees and expenses paid at the time a mortgage transaction is finalized. They typically range from 2 to 5 percent of the loan amount and include charges such as the appraisal fee, title insurance, origination fees, attorney fees, and prepaid items like homeowners insurance and property taxes. Closing costs can sometimes be negotiated with the seller or rolled into the loan amount.
Fixed-Rate Mortgage
A fixed-rate mortgage is a home loan with an interest rate that remains the same for the entire term of the loan. This means your monthly principal and interest payment stays constant, providing predictability and protection against rising interest rates. Fixed-rate mortgages are available in various terms, with 15-year and 30-year being the most common. They are the most popular mortgage type in the United States because of the payment stability they offer.
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