Mortgage Basics

Refinance Mortgage

Refinancing a mortgage is when a homeowner takes out a new mortgage to pay off an existing mortgage.

Homeowners refinance their mortgages for a variety of reasons; to secure more favorable terms like a lower interest rate, or to cash out equity for improving their property, consolidating debt, or paying for big ticket items like a college education or medical procedure. Homeowners should consider refinancing if their financial situation or credit profile is changing. For example, those considering retirement might want to make their planning easier by securing a fixed rate loan. Homeowners who are starting a family might prefer to guarantee a lower payment for a few years. Entrepreneurs founding new businesses might want to pull some capital out of their homes first, and sub-prime borrowers who have improved their credit should see if they have earned an improved rate.

Before entering into a mortgage refinance loan, homeowners typically use one of many online mortgage calculators, which are tools that help determine which available loan option is the best, and if the costs of refinancing are justified by the savings derived from changing the terms of their loans. By contacting several lenders and comparing their programs, borrowers can best determine which available mortgage refinance offers the most advantageous rate and terms.

New Home Loan

A new home mortgage is the first loan the buyer takes out to pay for a new property, not just the mortgage a first-time home buyer takes out. For first-time buyers, getting a loan can be challenging, so being well-informed when seeking a new home mortgage is the best borrowing strategy. Mortgages come in either fixed- or adjustable-rate kinds, and generally last for a term of 15 or 30 years. Unless the buyer makes a 20% down payment on your property, many lenders will require mortgage insurance.

In addition to the cost of the mortgage itself, the borrower will pay "closing costs" (a variety of expenses associated with the acquisition of the loan) as well as "points" (up-front interest charges; each point equals 1% of the loan value).

Qualifying for a new home mortgage often requires the buyer to have both good credit and a reasonable debt-to-income ratio. A common rule of thumb is that your housing costs shouldn't exceed 30% of your pre-tax monthly income (though this percent is higher in states where property prices are steep). Borrowers with credit problems will find it much more difficult--though not impossible--to get a mortgage loan.

Remember, a mortgage can confer significant tax benefits, as mortgage interest payments, property taxes, and even some home improvement investments are often deductible. (Please check with your tax advisor.)

Home Equity Loan

A home equity loan allows a homeowner to borrow money using their property as security. In determining the amount of the loan, lenders will evaluate the equity--the difference between the appraised value of the home and what the borrower still owes on it--along with the homeowner's credit rating and history of mortgage payments.

Home equity loans are a popular way to borrow money to pay outstanding credit card or health care debts, to finance a child's education, or undertake large home-improvement projects. The most common home equity loans are so-called closed end loans: the borrower receives a lump sum at the time of closing, with interest set at either a fixed or at an adjustable rate, depending on the agreement with the lender.

These closed end loans are not the same as a home equity line of credit (HELOC), where the borrower establishes a home equity account and draws funds when needed. HELOCs can be useful when you need money over time, rather than all at once. Interest accrues only on money that is withdrawn. Interest is not charged on the unused portion of the credit line.

Whether you need a home equity loan or a home equity line of credit, in many cases the interest is tax deductible. Please check with your tax advisor.