Remortgage
A remortgage, also known as a refinance, is a process of paying off an existing mortgage by obtaining a new loan, usually with a better interest rate or terms. This has become an increasingly popular option among homeowners, especially when interest rates are low.
In this article, we will discuss everything you need to know about remortgage, including its benefits, disadvantages, costs, and how to find the best deals.
The Benefits of Remortgaging
1. Lower interest rates: Interest rates have a great impact on the total cost of a mortgage. Refinancing to a lower interest rate can save homeowners thousands of dollars in interest charges over the life of their loan.
2. Reduced monthly payments: A lower interest rate also means lower monthly payments. For example, a homeowner who refinances from a 5% to a 3% rate on a $200,000 mortgage could save approximately $200 per month.
3. Improved financial stability: Refinancing can provide homeowners with a fixed rate mortgage, which provides more stable monthly payments, allowing them to better plan and budget.
4. Pay off the loan sooner: With a lower interest rate, homeowners can also pay off their loan sooner, by either making extra payments or keeping their payments the same but paying off the loan faster due to less interest.
5. Cash-out option: Homeowners can refinance their mortgage and take out additional cash from their home equity to pay for home improvements, higher education, or other expenses.
The Disadvantages of Remortgaging
1. Fees: Just like when obtaining an initial mortgage, refinancing comes with fees such as appraisal and processing fees which can add up to thousands of dollars.
2. Extending the loan term: Refinancing to a lower payment or rate comes with the possibility of extending the loan term, which ultimately increases the total amount paid in interest even with a lower interest rate.
3. Requirements to qualify: Homeowners must qualify for refinancing through their credit score, employment history, and income. If they do not meet the requirements, they may be better off sticking with the current loan.
4. Risk of foreclosure: Homeowners who take out cash from their home equity could put themselves at risk of foreclosure if they are unable to make the payments on the refinanced mortgage.
How to Remortgage
1. Check your current mortgage terms: Before considering refinancing, homeowners should check their current mortgage terms, including the interest rate, terms, and fees to determine if refinancing is worth it.
2. Review credit score: Homeowners should review their credit score to determine whether or not they qualify for refinancing. The better the credit score, the better the chances of qualifying for a low-interest rate refinance.
3. Research mortgage lenders: Homeowners should research mortgage lenders, comparing rates and terms from at least three different lenders before deciding on one.
4. Apply for refinancing: Once the homeowner has chosen a refinancing option, they should fill out an application for refinancing and provide the lender with the necessary documents proving their employment and income.
5. Finalize details: Finally, once the lender approves the application, the homeowner will need to obtain a new appraisal, pay for closing costs, and sign the final paperwork to close the refinancing transaction.
The Costs of Remortgaging
Refinancing comes with certain costs that homeowners should be aware of, including:
1. Application fee: Some lenders may require an application fee to cover the administrative costs associated with processing the refinancing application.
2. Appraisal fee: An appraisal fee covers the cost of a professional appraiser who evaluates the value of the property being refinanced.
3. Closing costs: Closing costs can include fees for title search, attorney fees, and other miscellaneous closing costs, which can add up to thousands of dollars.
4. Prepayment penalty: Some mortgage loans come with a prepayment penalty, which comes into effect if the homeowner repays the mortgage ahead of schedule.
5. Points: Some lenders may require points, equal to 1% of the total refinance amount, which can be considered prepaid interest.
Finding the Best Remortgage Deals
Homeowners can find the best remortgage deals through research, comparison, and negotiating with mortgage lenders. Some tips to consider are:
1. Shop around: It is important to shop around and obtain quotes from multiple lenders to find the best deal.
2. Review rates and terms: Homeowners should compare rates and terms offered by each lender to find the most suitable refinancing option.
3. Review closing costs: Homeowners should review the closing costs along with interest rates. Even a cheaper interest rate may not outweigh high closing costs.
4. Negotiate: Homeowners should negotiate with the lenders to reduce fees or negotiate a lower interest rate. Lenders want the business and may lower fees and offer competitive rates.
Conclusion
Remortgage is an attractive option for homeowners who are looking to save on their mortgage payments, reduce their monthly payment, or take out cash from their equity. While this option comes with certain costs and potential risks, it can ultimately provide homeowners with financial stability and savings. By researching, comparing rates and terms, and negotiating with lenders, homeowners can find the best remortgage deals available.