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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Remortgaging
Remortgaging is a way to save money or tap into your existing equity. The timing of remortgaging is very important, let us look at what needs to be considered before committing to remortgaging.
What Does Remortgage Mean?
In the United States of America, we call remortgaging refinancing. It is the process of paying off our mortgage with the proceeds from a new mortgage and using the same property as collateral.
There are various reasons why a homeowner may choose to remortgage, usually, the reason is to reduce their overall monthly mortgage payment amounts.
While remortgaging, a homeowner moves their mortgage to a new deal with another lender, or move to a different deal with their current lender.
Switching to a new interest rate with their current lender is only a product transfer, where nothing much will change except for the amount one repays each month.
How Does Remortgage Work?
Remortgaging involves taking out a new mortgage loan and replacing their existing loan.
When a homeowner remortgages, they apply for a new home loan just as they did when they bought the house. But instead of using the loan money to purchase a home, this time it’s used to pay off their existing mortgage.
Remortgaging effectively erases the debt on the borrower’s current mortgage. It also lets them choose the rate and loan terms on their new mortgage, so they can get a new home loan that saves their money or helps them to accomplish other financial goals.
The result is that they continue to pay off their home – but now they would be making payments on the new loan instead of the old one.
A borrower doesn’t actually pay off the first mortgage themselves, it is the mortgage lender involved who handles that part at the back end.
As far as the borrowers are concerned, the remortgaging process is a lot like their original home loan process.
Homeowners remortgage because they get to choose the rate and loan terms on their new mortgage. So they can take out a new loan that’s more affordable or benefits them in another way
Example of Home remortgaging
The most common reason to remortgage is for a lower interest rate.
Supposing a homeowner bought a house for $300,000 two years ago. By made a down payment of $30,000 and took out a mortgage loan for $270,000 to cover the purchase price.
Now, when the interest rates have fallen, the homeowners want to lock in a lower mortgage rate and reduce their monthly payments. So they go for remortgaging.
If the lender they used to buy their home can now offer them a lower rate and better terms, they can easily remortgage with their current lender.
But the homeowner is also free to shop around for another company that can offer them an even better deal.
In fact, it’s highly recommended that it be done especially if the borrower’s finances have changed since they got their first mortgage and they have built good home equity then they may be able to pay off debts and improve their credit score.
As their finances improve, they’ll have access to better mortgage options than they did when they bought their home.
They can also change the features of their home loan when they remortgage.
The borrowers can choose – the number of years in their loan term, the nature of their interest rate, and they can also choose what they pay in mortgage closing costs.
Many homeowners remortgage to get a lower mortgage rate. But remortgaging can also help them to pay their home off more quickly, avoid mortgage insurance, or tap their home equity to pay off debt or fund home improvements.
Different Types of Remortgages
Remortgaging comes in three varieties – rate–and–term, cash–out, and cash–in. Which loan option is best suited for the homeowner will depend on their personal finances.
Remortgage Rates Vary Between the Three Types
A rate–and–term:
It allows homeowners to change their existing loan’s mortgage rate, loan term, or both. For instance, they can change from a 30–year fixed–rate mortgage to a 15–year fixed-rate mortgage.
Or from a 30–year fixed-rate mortgage with a 5% interest rate to a new 30–year mortgage with a 3% fixed rate another example is from a 30–year fixed-rate mortgage with a 5% interest rate to a 15–year fixed loan at 3%.
The purpose of a rate–and–term loan is to save money. Borrowers do this either by getting a lower monthly payment or paying less interest overall because of a lower mortgage rate or a shorter loan term.
Cash-out refinance:
The purpose of the second type of remortgage – a cash-out refinance is to tap into home equity.
So if a home is worth $300,000, and the borrower owes $200,000 on their mortgage, they have home equity worth $100,000.
To access the home equity the homeowner has to take a loan against the value of their home.
With a rate–and–term remortgage, their new loan balance is equal to what they currently owe on the home, and it’s used to pay off their existing mortgage. But with cash-out refinance their new loan balance is bigger than what they currently owe.
Cash–in refinance:
Cash–in remortgages and cash–out remortgaging is the opposite.
While remortgaging with cash–in the homeowner brings cash to closing to pay down the loan balance and lower the amount owed to the bank.
This could result in a lower mortgage rate, a shorter loan term, or both.
There are several reasons for homeowners choosing the cash–in process of remortgaging.
One of the main reasons is to get lower interest rates which are available only with a lower loan–to–value ratios (LTVs). A loan with an 80% LTV, will result in higher interest rates than a loan at 75% or lower LTV.
Another reason for cash–in remortgage is to cancel mortgage insurance premium (MIP) payments.
When the homeowners get a remortgage loan, they are establishing an all-over new home loan with brand–new terms. This means they have to go through the complete mortgage application and approval process.
Mortgage underwriters will evaluate their application in three areas:
- Credit score and credit history
- Income and employment history
- Assets and cash reserves
Their home will also be appraised to confirm its current market value, exactly like the way it was when they got their existing loan.
Even though buying and remortgaging are similar, borrowers can usually expect to provide less documentation during the remortgaging process.
They may still need to provide proof of income using W–2s and pay stubs; proof of assets by providing bank statements; and proof of citizenship or U.S. residency status.
But they will not be asked to provide information related to the original transfer of the home.
Remortgages are often ready to close in 30 days or fewer.
But sometimes due to market conditions, the closing times may change. If there is a drop in rates leading to many homeowners remortgaging at the same time, it could delay the process to 40–45 days or longer to close.
Conclusion
Borrowers need to have a clear idea of why they are remortgaging their loan, is it to lower their monthly payment, to get a shorter loan term, or for the purpose of replacing an adjustable-rate mortgage with a fixed-rate loan.
Shopping around can help the borrowers get the best deal, and they can also check if their existing lender can offer them a more competitive deal compared to their current lender.
