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Mortgage Refinancing

Frequently asked questions regarding mortgage refinancing related personal finance topics

Q: What does LTV stand for?

LTV stands for Loan to Value ratio, and is used in the mortgage industry to calculate the amount of equity in a home. LTV is calculated by adding all the mortgages and liens on a property, then dividing that sum by the property's market value. For example, assume a property has a $230,000 first mortgage, a $30,000 second mortgage, and the market value is $400,000. The total mortgage balances equate to $260,000, and when divided by the $400,000 market value, gives us the resulting LTV of 65%.

Q: What is a cashout refinance?

Cash out refinancing is a form of mortgage refinance whereby the borrower will receive cash in their hands. If a person has built up equity in their home, they could potentially replace the current mortgage on their home with a new mortgage for a larger amount. The difference between the old and new mortgages is considered "cash out", money that you can use for whatever purposes you wish.

Q: You want to refinance, do you need a downpayment?

You will not be required to make a down payment when refinancing a mortgage. However, keep in mind that you will most likely have other costs associated with refinancing any mortgage. Examples of such costs include an appraisal, title fees, and attorney fees.

Q: How do I find the lowest refinance mortgage ratest?

There are many respectable websites that publish current mortgage rates. Bankrate.com and Yahoo are two examples. Include your current mortgage holder when shopping for a new mortgage loan. This lender may be willing to lower any costs associated with a refinance. Even if you find a better interest rate, lower loan costs may provide an overall better deal for you.

Q: What is the FHA?

The Federal Housing Administration (FHA), is a government agency that is a part of the Housing and Urban Development (HUD) department. The FHA provides mortgage insurance on loans made by lenders approved by the FHA. Mortgage insurance protects lenders against losses if a homeowner should default on a mortgage loan. Conventional, or non-FHA insured loans, normally have strict loan approval guidelines. FHA-insured loans, on the other hand, require very little down payment and are flexible in how household debt-to-income ratios are calculated. The FHA was created in 1934 during the Great Depression to enable consumers, who would otherwise be unable to afford it, to purchase a home. Today, the FHA's primary goal is to secure mortgages for individuals with low to moderate income and with poor credit or unable to make a down payment. For more information - please see our article on FHA loans.

Q: What is Fannie Mae?

The Federal National Mortgage Association (FNMA), also known as Fannie Mae, was created in 1938 as a government agency. Its function, at that time, was to make mortgages affordable for low income families. In 1968, Fannie Mae was converted into a stockholder owned entity - and thus no longer under direct government control. Today, Fannie Mae, along with Freddie Mac, serves as a mechanism to provide liquidity and flexibility to the housing and credit markets. Fannie Mae purchases mortgage loans from approved lenders, either by paying cash to the lender or in exchange for a mortgage backed security (MBS) securitized by those loans. Those securities, for a fee, carry Fannie Mae's guarantee of timely payment of interest and principal. This gives lenders fresh money to make new loans. Fannie Mae is able to provide this guarantee to its mortgage-backed securities since it sets the underwriting guidelines for the loans that it will agree to purchase. "Non-conforming" loans are mortgages that do not conform to Fannie Mae's guidelines. Fannie Mae can also securitize mortgages from its own mortgage portfolio and sell to investors the resulting mortgage-backed security in the secondary mortgage market, again with a guarantee that the stated principal and interest payments will be timely passed through to the investor.

Q: What is Freddie Mac?

Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac, is a privately owned government-sponsored enterprise (GSE) corporation chartered by congress for the purpose of ensuring stable and liquid mortgage markets in the U.S. while providing affordable homeownership opportunities in the mortgage and rental housing markets. Freddie Mac supports stability in the secondary mortgage market through two main business lines. The credit guarantee buys mortgages and related securities in the secondary mortgage market, then securitizes these mortgages and eventually sells them to investors as mortgage-backed securities. The investment portfolio business line purchases mortgages for the mortgage-related investments portfolio. Freddie Mac is not a lender. Instead, they buy mortgages from approved lenders, giving lenders the ability to increase their supply of funds and make more mortgages.

Q: What is Ginnie Mae?

The Government National Mortgage Association(GNMA), or Ginnie Mae, is a U.S. government-owned entity belonging to the Department of Housing and Urban Development. Like Fannie Mae and Freddie Mac, Ginnie Mae does not make loans, but instead provides a mechanism to allow for liquid mortgage markets and promote affordable housing in the U.S. Ginnie Mae guarantees mortgage-backed securities (MBS) that are backed by federally insured (FHA) or guaranteed loans (Department of Veterans Affairs).

Q: What is a Government Sponsored Enterprise (GSE)?

A GSE is an enterprise chartered by congress under the pretext of conducting or facilitating business activity for the benefit of the U.S. public. GSE's are quasi-government agencies or corporations because though they are privately owned, they hold certain privileges not afforded to your typical privately held institution. Freddie Mac and Fannie Mae are examples of GSE's.

Q: What is the secondary mortgage market?

The secondary mortgage market is the name for the credit market that has evolved for the selling and buying of bonds and securities that are collaterized by home mortgage loans. Often, in today's mortgage industry, a mortgage lender will make a mortgage loan, then bundle it with a group of other mortgages to sell as a security. The benefit for the lender is twofold, they divest themselves of the risk in the loan, and are able to replenish their funds to make more loans.

Q: What is a Mortgage Servicer?

A mortgage servicer (also called a loan servicer or simply a servicer), is a company that performs certain administrative duties on mortgage loans. Examples of these duties can include one or more of the following; collection of payments, record-keeping, payment of insurance and taxes, and loan delinquency activities.