Mortgage Glossary
Equity
Home equity is the difference between your home's current market value and the amount you still owe on your mortgage. As you make payments and your home appreciates in value, your equity grows. Equity can be accessed through a cash-out refinance or home equity loan, and it serves as a key measure of your financial stake in the property. Building equity is one of the primary wealth-building benefits of homeownership.
Related Terms
Appraisal
An appraisal is a professional assessment of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal before approving a mortgage to ensure the home is worth at least as much as the loan amount. The appraiser evaluates the property's condition, features, and location, and compares it to recent sales of similar homes in the area. The buyer typically pays for the appraisal, which usually costs between $300 and $600.
Loan-to-Value Ratio (LTV)
Loan-to-value ratio is the amount of your mortgage divided by the appraised value of the property, expressed as a percentage. For example, if you borrow $320,000 on a home appraised at $400,000, your LTV is 80 percent. LTV is a key factor in mortgage approval and pricing. A lower LTV typically means better rates and the ability to avoid mortgage insurance, while a higher LTV indicates more risk for the lender.
Refinance
Refinancing is the process of replacing your existing mortgage with a new one, typically to obtain a lower interest rate, change your loan term, or access home equity. A rate-and-term refinance adjusts your rate or repayment period, while a cash-out refinance lets you borrow against your equity and receive the difference in cash. Refinancing involves closing costs similar to your original mortgage, so it is important to calculate your break-even point to determine if it makes financial sense.
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