Refinancing your mortgage can be a way to save money, but not in all situations. Since there are costs associated with all refinancing, sometimes getting a lower interest rate can actually be more expensive than maintaining your current loan. In addition, analyzing all offers from lenders can be overwhelming and even deceptive.
So, how do you determine if a Remortgage is right for you? First, you must understand how remortgaging works. Then, consider your financial situation and what you want to achieve with a refinance. Finally, take a look at the loans for which you are eligible in the context of your long-term financial goals.
The factors below detail this process and will help you make an informed decision when it comes to refinancing your current mortgage or not.
How remortgaging works
When you refinance a mortgage on your home, you pay the original mortgage and replace it with a new one. The terms and the interest rate of the new loan may be different, but the property that secures the loan remains the same.
Since you already own the property, it is often easier to refinance than to obtain the original loan. Also, if you have owned your property for a long time, you may have significant capital, which can also facilitate refinancing.
When it comes to costs, there are two important things to understand. The first is that remortgaging comes with almost as many costs as the initial mortgage. You will have to pay closing costs, title insurance, and attorney’s fees, and you may also have to pay an assessment, taxes and transfer fees.
It is definitely not free. Although many banks advertise mortgages “at no cost”, there is really no such thing. However, you can get a mortgage at no out-of-pocket cost where closing costs are added to the loan balance (meaning you’ll pay interest on closing costs) or you’ll simply pay a higher rate to cover them.
Therefore, when considering a remortgage, it is vital to determine if the savings you will get from a lower interest rate will offset the costs that you will incur.
The second thing to understand is that closing costs vary according to your rate. In other words, if you want the lowest rate available, your closing costs will be relatively high. Alternatively, if you accept a slightly higher rate, your closing costs will likely be reduced.
For example, a 6% refinance may cost $2,000 to close, while a lower rate of 5,75% could cost $3,000. But if you accept a rate of 6.5%, you may not have costs Pocket at all. In fact, the 6.5% loan may have been advertised as a “no-cost” loan. However, you can see that you are effectively “paying” closing costs in the form of a higher interest rate.
How refinancing can save your money
You probably already know that a remortgage can reduce your monthly payment. However, a lower interest rate can also allow you to accumulate capital more quickly and cancel your loan balance. When you pay your mortgage each month, look at your account statement carefully. Because your mortgage is amortized over a long period of time, usually 30 years, interest payments make up a significant portion of the monthly payment, particularly during the first ten years of your loan.
When you refinance your mortgage at a lower interest rate, the amount you pay in interest will decrease. Also, if the term of your new mortgage matches the number of years you stayed on your original mortgage, the amount you pay for the principal will increase. If you can afford it and do not have other high-interest debts, a good strategy is to direct the amount of money you save from refinancing to additional principal payments. In this way, the monthly amount of your mortgage does not change, but you can pay your home much faster.
In most cases, a remortgage involving the removal of private mortgage insurance (PMI) will also help save money. If your home has more than 20% equity, you will not have to pay PMI, unless you have an FHA mortgage loan or are considered a high-risk borrower. If you pay PMI and your current lender will not eliminate it even if your home has at least 20% equity, you may want to consider refinancing just for this reason.