Refinance Mortgage Rate Key Terms

Learn about some of the terms you'll be dealing with when refinancing your mortgage

By Jason Wood

Refinancing a mortgage is a similar process to obtaining a mortgage on the property initially. However, there are a few key terms that you'll be dealing with when completing a mortgage refinance. Here are some terms with quality resources to help you along the way.

Rate and term refinance

A rate and term refinance refers to a new loan that is secured to replace an old loan, in which only the rate and term of the loan is changed. A rate and term refinance loan is popular for borrowers looking to secure a better interest rate over a longer period of time.
Try: The Truth About Mortgage.com has an informative article discussing rate and term refinance.

Pre-payment penalties

A pre-payment penalty is a fee assessed by the lender from the borrower if they pay off their loan before the end of the term. Many loans that are re-financed have a pre-payment penalty component in them so that the new lender is guaranteed a minimal return on their investment. When shopping for refinancing, be sure to take any potential pre-payment penalty into consideration.
Try: Visit Mortgages.com for an article explaining the concept of pre-payment penalties.

Home or property equity

Home equity, or property equity, refers to the difference between the value of your home or business location and the mortgage being held against it. Home equity is calculated at the time of refinancing by having the home or business appraised. Depending on market conditions, the equity may be higher or lower over the course of time. Most refinancing loans will not let a borrower refinance unless they have at least 5% and optimally at least 20% equity in the property.
Try: Visit the Federal Reserve for a further discussion on home equity, or property equity, and how it relates to the process of refinancing.

Cash-out refinance

A cash-out refinance refers to a new mortgage that might have a different interest rate or term, but primarily raises the amount of the mortgage for the borrower. A cash-out refinance is popular for borrowers who have a large amount of equity, but who have a large expenditure in the near future. For instance, a business might do a cash-out refinance to purchase new commercial machines in order to help their business grow. A cash-out refinance is usually favorable to placing such purchases on a credit card because of tax breaks and lower interest rates.
Try: Get Smart.com has a further discussion of refinancing terms as well as more information about a cash-out refinance.

Points

The term points refers to paying a piece of the overall interest during the closing of the loan in order to get a better interest rate over the life of the loan. One point equals 1%.
Try: Visit the website for Mortgage Loan.com for more information regarding points.

No seasoning

No seasoning refers to a refinance from a new lender that does not require the borrower to have held the previous mortgage for a period of time. This is commonly found in investment properties where businesses have the option to get a better interest rate. Conversely, seasoning means that a borrower must have held the previous mortgage for a certain amount of time.
Try: Visit Mortgage QnA for additional information on a no seasoning refinance option and how it works.