Remortgages Guide

A remortgage, or mortgage refinancing, is a renegotiation of your original mortgage terms in order to get a better rate, better terms, pay off your mortgage sooner or cash in on some of your home’s equity. There are a variety of reasons to get a remortgage as well as a number of pros, cons, risks and rewards involved in getting a remortgage.

Remortgages: What Are They and What Aren’t They

A remortgage is more commonly referred to in the U.S. as a mortgage refinance. Simply put, a remortgage terminates your original loan and starts you over with a brand new mortgage. You can remortgage with your existing lender or move to a new mortgage lender. In either case, the original loan is either paid off completely out of pocket, or the new lender pays off the original mortgage and rolls the costs into your new loan.

A remortgage should not be confused with a second mortgage, a default or a foreclosure. With a second mortgage, you are simply getting an additional loan while remaining responsible for your original mortgage loan. (Note, however, that a remortgage can be used to consolidate multiple loans.) Also, remortgage is not a default in that you are not violating the terms of your original loan. You cease paying the loan because you have paid it off, not because you are in default. While there may be penalty fees involved in early payment of your loan, your credit will not be damaged by a delinquency.

Reasons to Remortgage

There are a number of reasons to remortgage, but they all stem from two main drivers: a change in the economy or a change in your personal financial situation. Here are a few reasons why you might want to seek a remortgage:

• Get a Better Interest Rate: If the Fed cuts rates or your credit rating improves, you are likely eligible to get a better interest rate. A lower interest rate will save you thousands of dollars over the long run. This is the main reason why most homeowners seek remortgages.
• Lower Monthly Payments: When times are tight, you can get some relief by extending your mortgage for a lower monthly payment. For example, if you are 15 years into a 30 year mortgage, you can choose to remortgage the remaining principle and spread the payments out an additional 15 years, effectively resetting the timetable for repaying your loan in full. This does not substantially change how much you will pay in the long run (in fact, you will likely pay a little bit more) but it can drastically reduce how much you pay each month.
• Switch to or from an ARM: Adjustable rate mortgages (ARM) are attractive when interest rates are high, but when the market levels off, a fixed-rate mortgage is often better. Homeowners with ARMs may want to get a remortgage so they can lock in rates when interest rates are lower. Or they may wish to move from a fixed-rate mortgage to an ARM in order to get lower interest rates when fixed-rate mortgages interest rates are very high.
• Consolidate Loans: Consolidating debt can save you money and hassle by bringing all of your loans, mortgages and liabilities into a single payment with a single interest rate. For example, if you have personal loans, a home equity line of credit, a mortgage and an auto loan, you can remortgage in order to consolidate your expenses. This is particularly advantageous when the interest rates for one type of loan are much higher. For example, credit card interest rates are often much higher than mortgage rates. With a remortgage, you can eliminate that high interest credit card debt and pay the mortgage interest rate instead.
• Get Cash from Equity: Home equity is the difference between your home’s fair market value and how much you still owe your mortgage lender. Home equity is accumulated in two ways: paying off your mortgage and increasing the value of your home. For example, if you finish a basement, build an addition or otherwise improve your home, your equity will increase. Likewise, as your home appreciates in value due to improvements in the real estate market, your equity increases. With a remortgage, you can “cash out” some of this equity. Refinancing to tap into home equity is different from getting a home equity line of credit (HELOC) for a number of reasons, some of which will be discussed below.

Pros of Remortgaging

Remortgage is advantageous depending on your situation. Being able to seek a remortgage adds some flexibility into what would normally be a rigid, 30-year loan. Remortgages allow you to adapt to your changing finances, for better or for worse. For example, if you are laid off and your income drastically changes, you have a child or you have some other unforeseen expense, remortgages help you move into a financial arrangement that helps you handle the new circumstances. Likewise, if you get a big promotion, receive a financial windfall or otherwise find yourself with more income or assets than you assumed you would have when you first got a mortgage, you can renegotiate your mortgage terms in order to save you money in the long run.

Bottom-line: The main advantage of a remortgage is flexibility. When your financial picture changes or the real estate market changes, remortgages allow you to change your mortgage terms as well.

Cons of Remortgaging

When seeking a remortgage, it’s important to weigh the potential benefits of a remortgage against the costs. Remortgages, like your original mortgage, come with a set of fees and other costs that somewhat dampen the pros of remortgaging. You may have to pay thousands of dollars worth of origination fees. Furthermore, some lenders will levy an early payment fee for paying off your loan too soon. Nevertheless, the advantages of remortgaging can—and often do—more than compensate for the upfront costs. But if they do not, another financial instrument—such as a HELOC, which typically has no origination fees—may be more prudent. At any rate, it is best to refinance once at the absolute best time, rather than continually chasing better rates and terms and hopping from lender to lender, racking up termination and origination fees along the way.

Conclusion

Those are the basics of remortgages. As we have discussed throughout this article, there are many nuances to remortgaging that affect whether or not a remortgage is right for you and your particular situation. For more tips, guides and advice on remortgages, check out some of our blog posts below: