How to Remortgage

by Kevin on July 7, 2009

I was doing some research the other day and came across a word I had honestly never heard of: remortgage. I had no idea what it was so I thought I would do an article explaining what it is for my readers out there that hadn’t heard of a remortgage either.

What is a remortgage?

You’ve heard of a remortgage — you just don’t know it. A remortgage is also called a refinance. (The light bulb went on for me.)

At the end of the day with a remortgage you pay off your current home mortgage balance with a new loan. That new loan, of course, usually comes with a lower interest rate or some other perk that gives you the incentive to give up your current mortgage.

Steps to Remortgage

There are certain steps you need to take to remortgage, or refinance, your home. These are the basic steps you’ll have to go through.

Assess Your Current Mortgage Situation

Before you can decide what type of remortgage loan you want you need to understand how your current loan is structured.

You need to know:

Once you’ve gathered this information (which you should know already!) you can make an informed decision moving forward.

Compare Rates

There are tons of ways to compare rates. Call your local banks and credit unions and speak with a loan officer. Check Bankrate.com’s mortgage rate section to get an idea of what you should be paying. Look at different national bank websites as they generally list generic rates.

Remember as you do your research that the rate you end up with is dependent on many variables such as your credit score, the amount of the loan compared to the value of the house (loan-to-value ratio), and the individual bank.

Consider Remortgage Costs

You also must consider how much a remortgage is going to cost you. If the closing costs involved with getting a new loan are too high, it might make sense to stay in the higher interest rate loan. That sounds crazy, but here’s an example.

Let’s say to close on a loan that will drop your rate 1.00% and save you $100 per month you will pay closing costs of $5,000. That means it will take 50 months of saving that $100 you get every month from refinancing to pay for the closing costs. That’s over 4 years of diligent saving.

Is it worth it? You have to decide. Will you be in the house more than 4 years? If you plan to never move again then sure it makes sense — you’re still saving $100. But the cost is high and you might want to shop around some more.

Get Appraisal

Once you’ve decided on a lender to work with they will send out an appraiser to value your home. Up to this point you’ve probably given them figures about how much you paid for the home, what you think it is worth, and how homes are selling in the neighborhood. If you’ve got a ton of equity in your house this isn’t something to be worried about. Only when you get close to the loan ratios that would break a deal (you’ve got less than 10% equity, or something like that) should you start to worry.

An appraiser simply comes out and measures the home to verify square footage, and then gives an assessment as to the value. Is your yard trashed? Is the siding in need of replacement? Or have you upgraded everything and it really stands out as a great home in the neighborhood? All these (and many more) will affect the value of your home. (And the value of your home affects how much money you can get to refinance with.)

Close the Remortgage Deal

This falls under the should-be-easy-but-is-kind-of-stressful category. You’ll go to the closing office and bring your check for remortgage closing costs. The bank and title agent will be there. You’ll sign away your life — again — on a mortgage. In 30 minutes or so you walk away, new mortgage, interest rate, and lower payment in hand.

{ 1 comment }

Liz July 7, 2009 at 10:51 am

Just wanted to point out something that’s a pet peeve of mine in the refinance world. I’ve refinanced my mortage many times, and each time the salesperson talks about “how long I’ll be in the home.” However, that’s not really the important point. The important point is “how long I’ll have the mortgage.” If, like me, your mortgages have an average life of 2 years, it doesn’t matter if you stay in your house 10 years, you might still end up with a bad deal.

Also, there are several ways to calculate your “break-even” time (the time at which the monthly savings offsets your closing costs). A more conservative approach considers the after-tax savings on interest, which results in a longer break-even. A still more conservative approach compares the difference between using that $5,000 to pay down your current mortgage, rather than using it to refinance into a new mortgage.

I considered refinancing recently, but did the calculations and determined I was far better off just prepaying my mortgage instead. Saved me time AND money!

Here is a site that has multiple break-even calculations:
http://www.dinkytown.net/java/MortgageRefinance.html

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