Glossary

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Refinancing

The process of the same mortgager paying off one loan with the proceeds from another loan.

If your current interest rate is higher than what is presently available or you would like to use some of the equity in your home, then you may be considering refinancing. Refinancing is simply paying off your current mortgage with a new one.

There are a variety of reasons to refinance. Perhaps you have an Adjustable Rate Mortgage (ARM) and interest rates are rising. It would be probably be smart to refinance to a fixed-rate mortgage and lock in a good interest rate. Or you may want to build equity more quickly. Refinancing from a 30-year fixed-rate mortgage to a 15-year fixed is a great way to do that. (Keep in mind that this move does mean higher monthly payments.) Another reason to refinance may be to access the equity you have built up in your home. This is done through cash-out refinancing, which allows you to take out a larger mortgage and get some of your equity in cash.

When deciding whether refinancing is right for you, you need to determine your break-even point. The break-even point is how long it will be until the savings from the new mortgage is more than it costs in closing costs and fees to get the new loan. The length of time before the new loan pays for itself can help you to determine if refinancing will benefit you.

For example, if you have a 30-year fixed-rate mortgage for $150,000 with an interest rate of 8 percent, you may think you can get a better rate. After paying on the mortgage for six years, your remaining principal is $140,737. Currently, your monthly payment is $1,100. If you refinance and get a 6 percent interest rate, your new monthly payment would be $844. If you pay 3 percent of the new loan amount in costs associated with refinancing, you would break even in a little more than 16 months. If you know you will be moving prior to that, then refinancing would not make sense. If, however, you plan to be in the home for many more years, refinancing can be a good economic decision.

Before deciding about refinancing, check out the Refinancing Calculator [http://www.lendingtree.com/smartborrower/Refinance-calculators/Refinancing-calculator.aspx] in the LendingTree Smart Borrower Center. Be sure to factor in your taxes and whether you will roll your closing costs into your loan or pay them up front.

 


 

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