Home Refinance Terms

• Know the terminology before you refinance. Creatas/Creatas/Getty Images

  Perhaps you want to refinance your mortgage loan because the prevailing interest rate decreased and you'd like a lower monthly payment. Or maybe you've paid the loan down and want access to the built-up equity. Before you arrange refinancing, you should know the basic terms.

Annual Percentage Rate (APR)

• By federal law, a lender must disclose the Annual Percentage Rate so you can compare the cost with other products. The APR is all costs, including the value of the points you must pay to get the mortgage, expressed on an annual basis.

Adjustable Rate Mortgage (ARM)

• When your loan is an Adjustable Rate Mortgage, the interest rate and monthly payment fluctuate according to uncontrollable market conditions. You'll pay a lower-than-market rate at the mortgage's inception, with a fluctuating monthly payment later. If you're more comfortable knowing your monthly payment until the mortgage expires, take out a fixed-rate mortgage.

Fixed-rate Mortgage

• With a fixed-rate mortgage, your lender will charge the same interest rate for the entire term and your monthly payments will remain the same. The interest rate is ordinarily slightly higher than for an ARM, but you can budget your payments for the term of the loan. In most cases, the interest is tax-deductible.

Loan-To-Value Ratio

• A loan-to-value ratio is the value of your home as it relates to the size of your loan. This important ratio translates to the amount of interest you'll pay. For example, if the amount you finance is only five percent less than the value of your home, expect to pay a higher rate of interest than if your house were worth 20 to 25 percent more than the loan.

Credit Rating

• Before a lender will grant you a mortgage loan, he determines your credit rating from any or all of the three credit rating services, TransUnion, Equifax or Experian. If you have a good credit score, he'll grant the loan at a reasonable rate. If not, he might deny your application or charge a higher interest rate. The national average rating is about 720.