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The Difference Between Home Refinancing And Remortgaging
There are some people who have different definitions of what is a refinance and a remortgage. The argument is that the former concerns moving a loan to a new lender while the latter refers to sticking to the same existing lender for your home loan with a restructured loan.
But basically, in the world of consumers, these 2 words can generally be used interchangeably referring “to the replacement of an existing debt obligation with another debt obligation under different terms” – Wikipedia.
Yet generally speaking, if we want to get into the meticulous details, it is generally accepted that refinancing means to move a mortgage to another lender. While remortgaging, or repricing, is to stick with the current lender but switch to a new loan… with preferably better rates.
Mortgage brokers and bankers will want you to believe that a refinance is a simple process that even an 11-year-old can do.
But do you know that there are entire textbooks written on the topic found in any neighborhood library?
If it is really that easy, a one page statement would be enough to describe the topic easily.
The primary reason why this is such a detailed topic is because it concerns many years of financial liability and a mistake can cost a home owner thousands of dollars in hard earned money.
When you first bought a property, you decision process for a loan is more simpler.
The ultimate goal was to find the best interest rates that are better than any other lender on the market. If you can find that, your decision will be easy.
However, the game changes when the time comes for you to refinance your mortgage.
There are many additional variables to consider and more time for your to make those considerations. Having more time on your hands only make you conduct more research and add onto more criteria to think about. This is why it can be a stressful period and process.
There can be a good time to do it and even a bad time to do it.
Predatory lenders are always stalking their next targets and you become a target when you become eligible for remortgaging.
Some lenders might advertise about lower monthly payments by signing up with them. But they do not tell you about how you will pay more in effect over the long term.
On application for these loans, there is no standardized set of documents that you have to prepare. This means that different lenders may request for different types of documents when assessing your application.
This is because they have different procedures and credit guidelines that they practice. But you can be sure that that are going to go through your credit history and personal income statements.
If your credit information is adverse, you might still get approved for a mortgage, but you might be subject to more stringent terms and higher interest rates.
Lenders want your business and can be flexible at times to acquire you as a client. But remember that they will only do so if it makes good sense to them. If they take a higher risk by leniently lending to you, you can expect to compensate that with higher charges.
Another key component of refinancing is that we always talk about loan-to-value. This means that your total loan will be up to a certain percentage of the value of the property. So the more valuable your property is, the easier it is to get approved by a lender.
This also means that if your home is worth less than what you own the bank, you can as good as say goodbye to the lender.
Beware of shady practices whereby people offer to overvalue your property so that you can get it refinanced. This might appear tempting at first glance. But you might suffer financially in the long run.
Refinancing for a new different rate
The classic saying is that we should refinance our mortgages as long as we can squeeze out some savings out of it.
But taking into account closing costs, sometimes you do not save as much as you think you are.
There can be many other reasons why someone would want to replace their loan with another.
Among those are to shorten or extend the tenor, to get cash on home equity for business use, to consolidate other financial liability, etc.
But the most common reason is just for a simple change of interest rates.
Firstly, when you intend to replace you current loan with a new one, the logical first thought is to either obtain a lower interest rate or a lower monthly payment.
A lower rate means that you will save on interest charges over the years. And a lower monthly installment will mean that you will alleviate your cash flow problems over the years.
In both aspects, there is a benefit for you as a home owner.
The only logical reason for someone to refinance to a higher interest rate with higher monthly payments is when a cash out home equity loan is involved.
In this instance, home owners will be willing to bite into less desirable deals in exchange for generating cash from equity locked up in the property.
A big factor for refinancing consideration is something is if often neglected. It is that of closing costs.
When people buy homes, they do think about closing costs. But on refinancing, it is often something that gets forgotten. It is similar to buying a home in that you will need to foot the bill on appraisals, credit checks, insurance, lenders fees, legal fees, etc.
Let’s take for example you will save $100 per month once you hook up to the new mortgage. But the closing costs amounts to $5000. This means that it will take 50 months to “breakeven”. Will it be worth it then to restructure your home loan? Probably not. But it will be an easy decision if your monthly savings come up to $1000.
This is how much influence closing costs have on your final decision.
There are fixed costs and some variable costs too.
The variable ones are often items that depend on the size or the value of the property, or even the total loan quantum.
For example, premiums mortgage insurance will be dependent on loan quantum. Attorney fees will be dependent on the type of property. Tax amounts will be dependable on the value of the property. Remember that for fixed costs, the smaller your property or loan is, the greater these costs are as a ratio to the loan.
Refinancing for lower mortgage rates is the most common reason for home owners to look to other lenders other than sticking to their existing ones. Depending on your personal objectives, it can sometimes suit you better to go for higher interest rates and higher payments too.