When can you refinance your home and how does it actually work for people?
Refinancing your home is the process of obtaining a new mortgage as a means to lower interest rates, reduce monthly payments, and take out cash out of your home for any financial reasons or for large purchases. You also remortgage if you want to change mortgage companies.
On a whole, refinancing is advantageous, especially if you are having a hard time paying off your bills and mortgage. But like most things finance, there are risks involved. You may incur penalties as a result of paying down your existing mortgage using your line of home equity credit. There’s also a possibility that the loan terms may change from fixed interest rate to variable, depending on the mortgage company. Refinancing could also mean extending the number of years that you are in debt. Can you afford another decade of paying a mortgage?
However, there are situations when remortgaging is the ideal option.
When can you refinance your home?
- You meet the term requirement
Most banks and lenders require that you are 3 to 6 years (on average) into your original mortgage before refinancing. The terms may differ from one lender to another, so it is best to check restrictions and details that a specific bank or lender imposes.
- It makes sense to refinance your home
Say you maintained your original mortgage for more than 3 years now. Does it make sense to refinance? Are the market conditions right?
To put it simply, refinance your mortgage only when it gives you financial flexibility or you will be able to save money. This means you need to consider a lot of factors before you take the first step to refinancing.
- Credit History
If you have a perfect credit history, refinancing can work to your advantage, such as converting a variable loan rate to a fixed one. You can also obtain a lower interest rate.
If your credit history is less than perfect or even bad, refinancing can be a risky move. Even if you do get approved for a remortgage, expect a higher interest rate.
- Economic climate
The best time to refinance is when interest rates are at an all-time low. You won’t even have to wait when the new rate is at least two points lower than your old one to lodge an application. However, if the economy is unstable, avoid refinancing your home as it could be difficult to make payments under the circumstances.
- Amount of time you plan to keep the house
If you plan to move out the house before the break-even period, the time for your mortgage refinance to pay for itself, you should stay with your current mortgage. The last thing you want is to pay for a new house, while you still have an existing mortgage.
- Length of mortgage
How long have you had your mortgage? If you are 20 years into your 30-year mortgage, it is likely that more of your payments will now apply to the principal, and help build equity. So, if you refinance in the later years of your mortgage, you will restart the amortisation process, and most of your monthly payments will be credited for paying interest once again.
- Early repayment charge
Does your mortgage have a redemption penalty? If it can’t be waived, even if you refinance with the same lender, reconsider remortgaging and paying off your mortgage early. This is especially true if the costs of the penalty fees keep you from gaining from refinancing, and increase the break-even period.
Still in doubt of whether to remortgage or not?
If your mortgage is now £100k at SVR 6.5%, remortgage. Look for a new deal at 4.3%, payable within 2 years.
How does refinancing work?
If you qualify for a remortgage and the economic climate works in your favour, take the time to fully understand how it works. Lack of information and ignorance about refinancing has caused many homeowners their homes.
- Remortgage involves cancelling your present loan and moving it to a different lender, if you so desire.
- Remortgage is a totally new mortgage, even when the same lender is used.
- Refinancing is not a separate product, so signing up for it means taking out a completely new mortgage deal. Since it is a new mortgage, you are eligible for some options, such as withdrawing built-up equity, and extending the length of your mortgage.
- When you refinance your home, there will always be associated fees and charges. But unlike fees associated with your original mortgage, they are investments.
- Your mortgage deal will be locked in for a set period of time, 1 to 5 years, depending on the lender. You have an option to cancel at any time for an enormous fee.
Remortgaging is a complex process. This is why experts recommend working with a mortgage broker for professional advice. And in the event that a mortgage doesn’t work for you, you can also complain to the Financial Ombudsman Service. It is also wise to stay with your current lender, especially if they offer good prices and services.