There is a chance to improve your financial situation if you have taken a mortgage – you can lower your borrowing costs or even get more money against the value of your home. The answer to the question “What is refinancing a mortgage?” lies in this article.
To get better credit terms, many owners of the property tend to refinance. Probably, you have heard about this term more than once and know that the use of this tool may open news prospects to pay off the mortgage sooner.
What is refinancing a mortgage?
It is quite simple to replace an old home loan with a new one in a perfect situation with a lower borrowing rate. Wise choice of a new mortgage will allow you to receive better conditions – decrease the number of your regular payments, finish payments for your mortgage sooner and save money on the borrowing rate for the term of your loan. If you need to really know what is refinancing a mortgage — understanding “this part” is crucial.
How does the procedure work?
You could take out a loan with a completely different lender from whom you took out an initial loan.
When you take out a mortgage, you can buy yourself time. For example, if you took out a twenty-year first mortgage and successfully made payments for seven years, you have 13 years to pay off the loan. After refinancing, the loan term will be extended on new terms – for example, to a new 20 or 30 years. Under the right circumstances, you may be able to pay off your mortgage sooner because you have already made payments for seven years.
However, refinancing comes with closing costs that can amount to about 2% to 5% of the amount of your refinance.
Main reasons to remortgage
People tend to remortgage due to various reasons. One of the most popular reasons is the goal of lowering the interest portion of the mortgage. However, you should do some calculations because the amount reduced should be more than the cost you incur in closing costs.
People tend to include into their financial strategy remortgage to shorten the period of taken credit and end payments for the mortgage sooner with a lower interest portion of the loan.
Some people tend to change the variable-rate credit to the loan with fixed borrowing costs.
If the down payment on the first mortgage was not high, there is a need to take out insurance. If the equity of the purchased house exceeds 20% after a certain period, there would be no necessity to pay insurance in case of refinancing.
Pros and cons of remortgage
Advantages:
- Get a lower percentage rate
- Decrease the amount of the mortgage you must pay for
- Shorten the period of your loan and get the chance to pay the debt sooner
- Possibility to change from a variable rate to the fixed one
- Chance to stop payments for insurance
- Use the equity of your house and get cash after closing the first loan
Disadvantages:
- High expenses for the closing costs
- Decreased value of your house in case you took cash after closing the first mortgage
- The remortgage process may take time
Step-by-step guide
To refinance a mortgage, you need to do the following steps:
- Do calculations – You need to be sure that taking new credit is financially beneficial to you.
- Compare offers from different moneylenders for mortgage refinancing.
- Review the loan terms offered carefully – proposed borrowing costs, charges for closing fees, and other terms and conditions
- Fill out a mortgage application.
- Compile the required documents – bank statements, tax returns, and other documentation
- Discuss with your prospective lender the possibility of locking in the interest rate. If the market changes, your interest rate will not.
- Have your home appraised – the lender may require this document to ensure your home is valuable enough to secure the new mortgage.
- Pay closing costs – you can either pay them on the day of the loan closing or include them in the new loan.
Will remortgaging have a negative impact on my credit report?
Refinancing can affect your credit score, but only minimally. This happens for a number of reasons:
- When you apply for credit, moneylenders order special credit checks to ensure you are qualified enough to borrow.
- You should be careful if you plan to apply for other types of credit, such as loans intended to buy a car or pay for education, in addition to refinancing.
- If you close the first loan and take out a new one, the loan term will shorten, and that will affect your score.
These reasons can affect your credit history, but not for long. If you are worried that checking different offers will negatively affect your score, try to compare offers within forty-five days. Each credit history check would be counted as one during this period.