Refinancing your home can be a smart move to save money and lower your interest rate. But before you sign on the dotted line, you need to understand some key terms that will affect your refinancing process. Here are seven home financing terms you should know before you refinance.
1. Loan-to-value ratio (LTV): This is the percentage of your home’s value that you owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000, your LTV is 66.7%. The lower your LTV, the more equity you have in your home and the more likely you are to qualify for a lower interest rate.
2. Debt-to-income ratio (DTI): This is the percentage of your monthly income that goes toward paying your debts, such as mortgage, credit cards, student loans, etc. For example, if your monthly income is $5,000 and your total debt payments are $2,000, your DTI is 40%. The lower your DTI, the more likely you are to qualify for a lower interest rate.
3. Closing costs: These are the fees and charges that you have to pay when you close on your refinancing loan. They may include appraisal fees, title fees, origination fees, points, taxes, insurance, etc. Closing costs can vary depending on your lender and loan type, but they typically range from 2% to 6% of your loan amount.
4. Points: These are fees that you pay to your lender in exchange for a lower interest rate. One point equals 1% of your loan amount. For example, if you pay one point on a $200,000 loan, you pay $2,000 upfront to lower your interest rate by a certain percentage. Points can save you money in the long run if you plan to stay in your home for a long time.
5. Fixed-rate mortgage: This is a type of mortgage where your interest rate and monthly payment stay the same for the entire term of the loan. Fixed-rate mortgages offer stability and predictability, but they may have higher interest rates than adjustable-rate mortgages.
6. Adjustable-rate mortgage (ARM): This is a type of mortgage where your interest rate and monthly payment can change periodically based on market conditions. ARMs usually have lower initial interest rates than fixed-rate mortgages, but they can increase or decrease over time depending on the index and margin that they are tied to.
7. Cash-out refinance: This is a type of refinancing where you borrow more than what you owe on your current mortgage and receive the difference in cash. You can use the cash for any purpose, such as home improvements, debt consolidation, education expenses, etc. However, cash-out refinances increase your loan balance and may have higher interest rates and closing costs than other types of refinancing.
