Home Refinancing | Mortgage Loans | Equity Loans

From Wikipedia, the free encyclopedia

Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. The most common consumer refinancing is for a home mortgage.

Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to pay off other debts, to reduce one's periodic payment obligations (sometimes by taking a longer-term loan), to reduce risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to liquidate some or all of the equity that has accumulated in real property during the tenure of ownership.

It is advisable to speak with a financial professional, familiar with your existing home loan, before deciding to refinance. Certain types of loans contain penalty clauses that are triggered by an early payment of the loan, either in its entirety or a specified portion. Also, some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.

A mortgage is a device used to create a lien on real estate by contract. The mortgage is an instrument that the borrower (called the mortgagor) uses to pledge real property to the lender (called the mortgagee) as security for a debt, also called hypothecation.

The mortgage instrument contains two parts:

· the mortgage, which is the pledge

· the note, which is the actual evidence of the debt and promise to repay (sometimes called a promissory note).

To protect the lender, a mortgage is recorded in the public records creating a lien (when there are multiple liens, order of recording determines priority). Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that the lien of the mortgage is prior to anyone else's claim.

History

At common law, a mortgage was a conveyance that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were met --- usually, but not necessarily, the payment of a debt by the original landowner. Hence the word "mortgage," Law French for "dead pledge;" that is, it was absolute in form and in theory required no further steps to be taken by the creditor.

In many U. S. states, however, a mortgage has been converted by statute to a device for creating a security interest in land. When the landowner fails to perform on the obligation secured by the mortgage, the mortgage holder must file a foreclosure to cause the property to be sold at auction, usually by the sheriff.

Mortgage finance industry

Mortgage lending is a major category of the business of finance in the United States of America. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S., the Federal Housing AdministrationGinnie Mae" and "Freddie Mac" (also known as the GSEs or government sponsored entitiess) to foster mortgage lending and thus to encourage home ownership and construction.

Levels and flows

United States

In 2003, total U.S. residential mortgage production reached a record level of $3.8 trillion through record low interest rates orchestrated by Alan Greenspan.

Glossary

· Adjustable Rate Mortgage (ARM)

· Fixed-Rate Mortgage (FRM)

· Fannie Maee - Federal National Mortgage Association.

· Fair Isaac

· FHLB Advances - Funding provided by Federal Home Loan Banks.

· Freddie Mac - Federal Home Loan Mortgage Corporation.

· Government Sponsored Entity (GSE) - Private organizations with government charters whose function is to provide liquidity for the residential loan market. GSEs purchase loans from lenders and assume risk for the asset, thereby protecting the investors in the MBS.

· Home Equity Loan (HEL)

· Homeowners Insurancee - Package policy that combines (1) coverage against the insured’s property being destroyed or damaged and (2) coverage for liability exposure of the insured.

· Loan to value (LTV) - Loan Amount / Value of property.

o Combined loan to value

· No Income No Asset (NINA)

· Manufactured Housing (MH)

· Mortgage Insurance (MI)

· Mortgage Servicing Rights Mortgage Service Rights (MSR) - The capitalized asset that represents the value of the servicing fees to be realized over the life of the loan. (See also yield to maturityy)

· Pooling — The process of grouping together mortgage loans with similar characteristics.

· Quick Claim Deed (QCD)

· Secondary mortgage market — The market where lenders and investors buy and sell existing mortgages and MBS securities.

· Securitization — The process of pooling loans into mortgage-backed securities for sale into the secondary mortgage market.

· Verification of employment (VOE)

Mortgage Loan Types

There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgagee (ARM).

In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the US, the term is usually for 10, 15, 20, or 30 years. In the UK the fixed term can be as short as five years, after which the loan reverts to a variable rate (which makes the loan an ARM).

In an ARM, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the US include the Prime Rate, the LIBOR, and the Treasury Index ("T-Bill"). Other indexes like COFI, COSI, and MTA, are also available but are less popular.

Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.

In most scenarios, the savings from an ARM outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.

A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. A balloon loan can be either a Fixed or Adjustable in terms of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due.

Other loan types:

· term loan or interest-only loan

· equity loan

· blanket loan

· package loan

· wraparound mortgage

· budget loan

· bridge loan