If you’re like most people, buying a home is the single biggest investment you will make in your lifetime. The mortgage on that home, whether short term or long term, is likely to form the lion’s share of your personal debt for some time. It is important for you to understand what is Home Remortgaging (or Home Refinancing as it is called in US and Canada) and know when it is the right choice for you.
What is Home Remortgaging
After you have paid your home loan for a period of time, the equity in your home can become a definite financial asset. To make it clear, every time you pay an EMI towards your home loan, there are two components. There is an amount that goes towards the principal and then there is your payment towards the interest.
As you keep paying, your principal component increases. For example, say you took a $200,000 loan on a property costing $250,000. After 10 years of payment, you have paid off about $80,000 of the $200,000 loan. In this scenario, you have additional equity on the property woth $80,000.
There may come a time when you consider borrowing against the equity in your property, either to make some home improvements or pay off some outstanding bills. Perhaps to even reinvest in a new property or in stocks as the interest rate is low. Long term, you might even consider remortgaging your home to reduce your monthly obligations and free up needed cash. But is remortgaging always the right decision?
What It Means to Refinance Your Home
In short, remortgaging or refinancing your home means switching your current mortgage in an effort to secure a more satisfactory deal. This can be done either be renegotiating with your current lender, or by changing lenders all together.
Often, remortgaging your home will allow you to secure a more favorable interest rate, saving you money in the long term; or to extend your existing mortgage to simply reduce your monthly obligations. While remortgaging is a viable option, it is not for everyone and there are distinct pros and cons to consider.
The Pros of Remortgaging
Most people remortgage their homes to save money, either in the long or short term. Properly leveraged, a remortgage can save you as much as $1000 per year. If you know how, and when, to remortgage. Consider the following times when it makes sense to consider a remortgage.
- Your Mortgage Deal is Changing – Many lenders offer mortgages that include a short fixed rate or discount period. These typically last 2 to 5 years. If that period is about to end, chances are you will be looking at a higher variable rate. This may be a good time to consider a remortgage, locked in a better interest rate.
- You Want a Better Interest Rate – You may find that you can secure a more favorable interest rate, and wish to take advantage of that by remortgaging. Have a care, however, as your existing mortgage may include an early repayment charge, and this can offset any possible savings.
- Rising Interest Rates – If your mortgage payments are tied to the Federal bank or your country’s central bank’s interest rates, remortgaging might be a sensible option. Keep in mind that if you are locked into an existing rate, and your lender is increasing interest rates on new mortgages, this will not affect you.
- The Value of Your Home Has Increased – If the value of your property has risen significantly since you took out your original mortgage, you may be eligible for lower rates. Be careful here, however, and double check you sums before considering a new mortgage.
- You Simply Want a More Flexible Mortgage – Perhaps you want a more flexible mortgage, that allows you to take advantage of payment holidays, or offers any early repayment provision. Perhaps your current lender will not allow you to borrow against the equity in your home, and a remortgage will open up this opportunity. Increased flexibility is one of the main reasons people remortgage their homes. But be careful, as these extra features are typically accompanied by higher interest rates.
The Cons of Remortgaging
While remortgaging your home does have its advantages, there are also some pitfalls to consider. Remortgaging is not always a sensible financial gamble, and it is important to consider both sides of the mortgage coin before making any decision. Before you commit yourself to a new mortgage, consider the following reasons why it may not be a good idea.
- Your Current Mortgage Debt is Too Small – Once your existing mortgage debt falls below a certain level, say $50,000, a remortgage will not really save you any money. Any savings will be offset by the attendant fees (processing fees), and many lenders are reluctant to take on smaller mortgages.
- Early Repayment Fees and Penalties – Many mortgages have penalties built in for early repayment. If your existing mortgage has an early repayment penalty, remortgaging may not realize enough savings to make it a worthwhile option. Do the sums, and consider carefully before applying for a new mortgage.
- Your Property’s Value Has Fallen – If the value of your home is now lower than your outstanding mortgage debt, remortgaging is not an answer as your equity would be in negative numbers. You are unlikely to qualify for a new mortgage, and the best you can do is to continue timely payments on your existing debt and hope for property values to rebound.
- Your Financial Circumstances Have Changed – If you or your partner have been made redundant or have changed employers, or your outstanding debt profile has changed, you may not be eligible for a new mortgage.
Before you consider a remortgage, you need to fully understand the possible advantages as well as the inherent disadvantages. For some home-owners, a remortgage makes good financial sense. For others, it is a perilous mistake. Do your sums, and consider your current financial status, as well as any possible changes that may take place in the future. Only when you are sure it is the right move, should you consider remortgaging your home.