Home refinancing : jargon-buster

Home refinancing can be a confusing process, not least because of all the jargon and abbreviations you encounter. This page gives a brief guide to some of the most common terms.

Amortization: paying off a debt gradually in regular payments.

Collateralize: to pledge something as security for repayment of a loan. Home refinancing (in the sense of taking out a second mortgage) usually means collateralizing your home.

Direct lender: an institution that lends its own money and makes the final decision on your application.

Discount rate: the rate charged by the Federal Reserve Bank in loans to member banks. An important indication of what's going to happen to mortgage loan rates.

Equity: the value of the property you actually own. Take the market value of your property and subtract what you owe on the property to find the equity you have. If your calculations give you a minus figure, this is known as negative equity.

Federal Reserve Board (USA): also known as the Federal Reserve or just the "Fed". The US central bank, whose duties include setting interest rates.

Federal Reserve interest rate (USA): also known as the "Fed Funds" rate. The rate at which US banks lend each other short-term funds.

Interest-only mortgage: a mortgage deal in which you only pay the interest on your loan, rather than repaying the money borrowed. Such deals usually last for a fixed period of time, often five years. When this time is over, the borrower usually has to switch to a repayment mortgage.

IRA: short for Individual Retirement Account. A self-funded retirement plan where you contribute a limited annual amount toward your retirement. Taxes on the interest earned are deferred until you retire and withdraw the money.

More common home refinancing terms:

Lien: a legal claim on someone's property as security for a loan. If the debt is not repaid, the lender can force the property to be sold in order to pay the debt. Most mortgages are liens.

Mortgage broker: someone who brings borrowers and lenders together. Most charge a fee for this.

Offset mortgage: a new kind of mortgage which takes your savings into account. Interest on your savings is used to reduce your mortgage debt each month. By offsetting your savings against your mortgage, you can avoid tax because you're giving up the interest. A good option if you have a lot of savings and you're in a high tax bracket. Less of a good option if you don't, as offset mortgages tend to have higher interest rates than other mortgages. You need to have at least $50,000 in savings for an offset mortgage to be worthwhile.

Points: a fee that the borrower pays to the lender. One point is one per cent of the total amount borrowed. The number of points is usually in inverse proportion to the interest rates offered - fewer points mean higher rates, and vice versa. Points are paid upfront when you purchase the property.

Product: in the banking world, mortgages and loans are often referred to as financial products. For example, a second mortgage might be called a home refinancing product.

Repayment mortgage: a mortgage in which your monthly payments cover both capital repayment and the interest due. Also known as a capital and interest mortgage.

SVR: short for Standard Variable Rate. The interest rate usually charged by a lender. Many introductory offers revert to the SVR after a certain period. If your mortgage is at SVR, your interest payments will vary as the rate goes up and down. Usually broadly linked to Federal Reserve interest rates.

Tracker mortgage: a mortgage that follows Federal Reserve interest rates. Often the same as a lender's SVR.

 

 

 

 

 

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Mortgage Refinancing

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