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A Mortgage Primer

Sheryl Landrum
LoanBiz Columnist

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Article Rating , 4 out of 5 based on 1 votes

If you are considering a refinancing to a new home loan or getting a second mortgage, here is some new mortgage terminology that will help you understand the terms and conditions of your refinance.

What is the difference between a rate and term mortgage refinance and a cash-out refinance? A rate and term mortgage refinance means you are refinancing the amount of money you owe on your current mortgage; you may want new loan terms (such as going from an ARM to a thirty year fixed) or you may wish to take advantage of lower interest rates. While closing costs are generally added to the new loan amount, no other cash is pulled from your home's equity.

A cash-out refinance simply means the loan amount is greater than needed to pay off your existing mortgage--more cash is drawn from your home's equity and the new home loan includes that cash. A cash-out refinance may have a slightly higher interest rate than a rate and term refinance.

If I do not want to refinance my first mortgage is there a way to draw cash from my home's equity? Many borrowers do not wish to refinance their first mortgages and choose a home equity line of credit or a home equity loan instead. A home equity line of credit is a second mortgage with a credit limit that allows borrowers to pay interest only on the funds they use, or "draw."  It's a revolving line that can be used like a credit card, and the interest rate is adjustable and based on the prime interest rate. A home equity loan is a fixed rate second mortgage, fully amortized (30 years due in 15). Lenders offer both these products at low, or no, costs.

Knowing mortgage terminology can help you when refinancing; make sure you talk to your loan officer before refinancing to get new home loan that best meets your goals.

About the Author
Sheryl Landrum is a Senior Loan Officer with First Capital Mortgage in San Diego and Prudential Realty in Bonsall, California.

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