Mortgage 101: Common Refi Lingo, Tips & Tricks

Refinance Dictionary

• Refinance: A refinance is the process of replacing your current loan with a new one. By refinancing their mortgage, homeowners can lower their monthly payments, pay less in interest, or even borrow cash.

• Home equity: This is the difference between how much your home is currently worth and how much you still owe on your mortgage. In other words, this is the amount of monetary value you currently have through your home.

• Term: A loan term is the amount of time you have to pay off your loan. Mortgages often come with a 15, 20, or even 30-year term.

• Interest rate: Usually determined when you sign the contract for a loan, an interest rate is the cost you’ll need to pay each year to borrow the money necessary to purchase your home or refinance your current mortgage. Rates are expressed as percentages.

• Fixed-rate mortgage: A fixed-rate mortgage is a loan where the interest rate never changes.

• Adjustable-rate mortgage (ARM): On the contrary, an ARM is a loan where the interest rate can change after a set period of time has gone by. ARMs usually start out with a lower interest rate than most fixed-rate loans, meaning lower monthly payments initially -- once the set period is over, however, your interest rate will fluctuate regularly, making it harder to anticipate payment costs.

• Loan-to-value ratio (LTV): This is the rate of risk that a financial institution looks at before offering a loan to a customer. The higher your LTV, the riskier a loan is, thus making a lower LTV better. Most lenders require an LTV of 80% or lower before offering a refinance loan.

• Debt-to-income ratio (DTI): A homeowner’s DTI is the percentage of their monthly income that goes toward paying off debt. A lower DTI is considered better by lenders, as it suggests that you’ll be able to continue paying off all of your debts on time.

In addition to these basic definitions, here are the three major types of mortgage refinances -- each type comes with their own pros and cons:

• Cash-out refinance: This type of refi allows homeowners to borrow a large sum of money by accessing their home equity. Homeowners can then use these funds to pay for large life expenses, such as a wedding, college tuition, or debt payments.

• Cash-in refinance: The least common type of refi, this allows homeowners to pay off a large portion of their mortgage at once. The purpose of this is usually to improve one’s LTV. In doing so, homeowners can make it easier to take out a better refinance loan in the future.

• Rate-and-term refinance: This type allows homeowners to take advantage of a new interest rate, loan term, or both. This has the potential to save you both on a monthly basis and in the long term. This is the most common type of mortgage refinance.

Quick Refi Pointers for Best Results

Now you know what a mortgage refinance is, but where do you go from here? Every refinance journey is unique, but here are our top three tips for getting the best out of your refi:

1. Write out your reasons for refinancing and stick to the plan: Before doing anything else, you need to know exactly why you want to refinance and how doing so will benefit you. This will make the entire process run much more smoothly, because you’ll know what type of loan you need and what terms and rates will work with your goals.
2. Keep an eye on rates: Rates fluctuate constantly. Whether you’re serious about refinancing or just looking at your options, start tracking interest rates. If your goal with refinancing is to pay less on your mortgage, you’ll want to know if (and when) the market improves so you can jump at the chance. For a look at today’s rates, click here.
3. Compare, compare, compare: We recommend not going with the first lender that gives you a quote, no matter what type of loan you’re looking at. Ask multiple companies for quotes so you can get a sense of what’s available and find the best deal. It might take a bit more effort, but it’s worth it, trust us.

Helpful PSAs to Keep in Mind

As we wish you the best on your refinance journey, remember the following:

Closing costs make a substantial difference. Always read the fine print and calculate these added costs when figuring out how much you’ll owe on a new loan.

Know when you might move -- does it really make sense to refinance? If you’re planning to move within the next few years, the upfront costs are unlikely to be worth it. Though a refinance can save you significantly in the long term, you’ll need to stick with your new loan long enough to recoup the initial fees before you see those savings.

Your credit score is king, so prioritize it as much as possible. This will make getting loans of all types easier.

While a refi may seem intimidating at first, the benefits you’ll reap will be well worth the effort. If refinancing your mortgage seems like a good option for you, we’ve compiled ratings and reviews of the top lenders to make the process easier.