Refinance Glossary

When you refinance your mortgage, it's like entering a linguistic netherworld, with all sorts of new, exotic, and entirely unfathomable terms to describe the process — amortization, appraisals, and liens, for starters.

RefinanceRates.com can help. We give you a refinance glossary to help you learn the terms involved, helpful articles to help explain the whole process, and mortgage calculators that help you determine whether it makes sense for you to refinance.

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Adjustable Rate Mortgage

If you don’t plan on staying long in your current home, an adjustable rate mortgage might be for you. But beware its pitfalls — many people who go into foreclosure are there courtesy of an adjustable rate mortgage, as their rate increased but they didn’t have the cash flow to pay the bill. An Adjustable […]

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Amortization

As you pay down your mortgage loan, some of your payment goes toward the principle of the loan, and some goes to the bank as interest for their hard work of lending you the money. The schedule of these payments is known as amortization. Strictly speaking, amortization is the paying off of an intangible debt, […]

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Appraisal

My home is worth HOW much? An appraisal is simply the estimated current market value of a property as determined by a professional appraiser. The value is usually determined by comparing the property to similar properties sold in recent months, or ones currently on the market (these are known as ‘comps,’ or ‘comparables‘). There is […]

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Cash-Out Refi

The primary goal for most mortgage refinancings is to lower a monthly payment. However, if you have enough equity built up in your home, you can also tap into that when do a refi. It’s simple enough – when you do a cash-out refinancing, you assuming a new mortgage at an amount that exceeds the […]

Closing

Most people describe a closing as hectic, and a little nerve-wracking – the closing is when everyone and everything must come together when you’re buying a home or refinancing a mortgage (although it’s a much simpler affair when refinancing a mortgage). A closing is a meeting that finalizes the sale and purchase of real estate. […]

Comparables

Also known as “comps,” comparables simply refers to recently sold or currently listed properties that are similar, or “comparable,” in style, size and age to the subject property (the one being bought or sold). Real estate agents and appraisers use the prices of these comps to determine an estimated fair market value of the subject […]

Credit Score

Your credit score is a number used to show creditors and lenders the creditworthiness of a potential loan borrower, or refinancing applicant. The number, or score, which can range between 300 and 850, is determined through an analysis of a person’s borrowing and repayment habits. How timely or late you are paying a bill or […]

Debt-to-Income

Your debt to income ratio is a measure of much of your income is spent paying your debts. A higher debt-to-income, or DIT, ratio means you are using more of your monthly income to pay off debts. Lenders, banks and even property rental companies use the DTI to determine your creditworthiness when refinancing a mortgage. […]

Equity

Equity is simply the value of a property minus the remaining mortgage balance. Equity is gained or lost by the appreciation or depreciation in the market value of the property. For example, if you paid $200,000 for a home and it’s risen in value to $250,000, and your mortgage is $150,000, your equity is $100,000. […]

Escrow

Escrow is when money or documents are held in trust by a third party to be delivered to another party at a set time, such as when certain conditions are met or for regular periodic payments. There are two most common types of escrow for real estate: The first is when a portion of a […]

Fixed-Rate Mortgage

A fixed-rate mortgage is a conventional mortgage loan that has an interest rate and monthly payment that remain the same for the life of the mortgage loan (typically 15 or 30 years total). The interest rate is usually just a little more than the rate of the 30-year Treasury Bond at the time the mortgage […]

Home Equity Line of Credit

A home equity line of credit is similar to the home equity loan, but instead of getting all the money at once, the borrower is essentially approved for a certain amount that they can withdraw in increments using a check book or debit card, up to the limit. Funds designated for a home equity line […]

Home Equity Loan

A home equity loan is a loan, or second mortgage, that borrowers take out against the equity in their home. Essentially, the owners are trading their equity for cash, which they pay back to the lender with interest. These loans are frequently used to consolidate other debt that has a higher interest rate (like credit […]

Jumbo Loan

A “jumbo mortgage” is called ‘non-comforming’ because it is larger than the home loan limits Fannie Mae and Freddie Mac are willing to back, or guarantee, because they are considered riskier than home loans under this amount. This can make it harder to land a mortgage depending on overall credit conditions. As of 2009, any […]

Lien

A lien is a legally approved claim against a property that allows the lien holder to be paid when the property is sold or refinanced, unless the debt is settled beforehand. In some cases a lien can transfer property to another if the debt obligation isn’t fulfilled. A plumber or roofing contractor can put a […]

Lock or Lock-In Period

The lock, or lock-in, has two meanings in the world of mortgage refinancing. First, it’s the timeframe in which a mortgage loan cannot be paid off earlier than stated without incurring a financial penalty. The lock-in exists so that the lender is assured of obtaining a certain minimum return on their investment in the form […]

Mortgage Insurance

Mortgage insurance protects the lender should the borrower default on the loan. The insurance is typically issued by the FHA or a private mortgage insurer — in the latter case the insurance is known as “PMI”. Mortgage insurance is usually required if the home buyer borrows more than 80% of the market value or purchase […]

Mortgage Points

Mortgage points are lender fees or advance interest that a borrower pays up front in exchange for a lower interest rate for a certain part of the loan term, often over the life of the loan. Also known as “discount points,” these points are based on a percentage of the loan, with each point equal […]

Mortgage Term

Mortgage term is the time period that a loan agreement is in force, covering the maximum time in which a borrower is suppose to repay the lender if the loan is not renegotiated or refinanced. You can alter your mortgage term simply by making additional payments toward the principal of your loan. One extra payment […]

PITI

PITI is an acronym that stands for principal, interest, taxes, and insurance, which are the four components of a mortgage payment. In relation to a mortgage, PITI (pronounced like the word “pity”) is an acronym for a mortgage payment that is the sum of monthly principal, the total monthly payment if fully amortized. If private […]

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Prepaid interest

Prepaid interest are interest payments that you make in advance, at the time of closing, to cover the period from the time the bank funds your loan (the day before or day of closing) to the date your first payment is due (about a month later). This interest is tax-deductible.

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Prepayment Penalty

A pre-payment penalty is a fee assessed by a lender as a charge to a borrower who makes an advanced payment or pays off a loan earlier than the due date or the payment terms in the agreement. The penalty fee compensates the lender for the loss of some of the interest that would have […]

Principal

Principal is the part of a monthly loan payment that reduces the outstanding balance of a mortgage, and becomes the equity for the borrower. By making extra payments toward your principal on a monthly or annual basis, you can greatly reduce how much interest you pay over the mortgage term. In the first few years […]

Qualifying Ratios

Lenders use qualifying ratios to determine whether someone can actually make the stated mortgage payment on their mortgage loan. They do this by comparing a borrower’s debt levels, expenses, and projected monthly income, to see how much of someone’s income will be going toward their housing expenses. There are a couple different types of ratios. […]

Refinancing

Refinancing is when a loan borrower obtains a new loan to replace the existing loan. Typically this is done to reduce an interest rate, or finance over a different period of time (say back out to a new 30 years or down to 15 years). It is done either to lower monthly payments, pay off […]

Second Home Loan

A second home loan can be either a home equity loan taken against the equity in your house (See “home equity loan” entry), or it can be second loan taken out to help cover the difference of your first loan and your down payment. For example, if your mortgage lender requires a 20% down payment […]

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Title

Title is a legal term for who holds the ownership rights or some interest in a piece of property. When you buy a home, the buyer will perform a title search to ensure that the seller owns the property free and clear, i.e., there are no liens (or claims) against it. The title search is […]