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If you ever want a lower monthly mortgage payment, to change your payoff timeline, or to take advantage of lower interest rates, a remortgage can help you do it.
This mortgage strategy has been particularly popular in the last year, as interest rates hit record lows. In fact, according to the Mortgage Bankers Association, a whopping 67.5% of all mortgage loans in the last quarter of 2020 were remortgages.
Exactly what is remortgage, though? And when should you consider one yourself? Let’s dive in.
What is a remortgage?
Remortgaging, more commonly called refinancing, is a method of paying off your existing mortgage loan and replacing it with a new one -- one with different (ideally better) terms.
The word "remortgage" is more commonly used in the United Kingdom and Canada, while "refinance" is more often used in the U.S.
Regardless of which term you use, the strategy is the same: You apply for a new mortgage loan, and once approved, those funds are used to pay off your old mortgage. You then have just the new loan -- as well as its new terms, payment, and rate -- and make your payments monthly just as before.
Why do homeowners remortgage?
There are lots of reasons you’d consider a remortgage. Most commonly, homeowners do it to save money. By remortgaging -- or refinancing -- into a new loan with a lower interest rate, you would save money both monthly (with a reduced payment) and over time (less interest in the long run).
Here’s a good look at some popular reasons for refinancing:
|REASON FOR REFINANCING||HOW IT WORKS|
|Take advantage of lower interest rates||If market rates drop below the rate on your current mortgage deal, remortgaging can help you take advantage of them. Keep in mind that your ability to get a better interest rate depends on your credit score, too.|
|Get a lower monthly payment||Remortgaging into a loan with a lower rate can give you a smaller monthly payment, too. You can also reduce your monthly payment by getting a remortgage with a longer loan term. (For example, choosing a 30-year remortgage loan would allow you to spread your remaining mortgage balance over 30 years, thus lowering your payments considerably.)|
|Pay off your loan faster||You can also remortgage to change your mortgage repayment schedule. If you remortgage and choose a shorter mortgage term (a 10-year loan, for example), this would allow you to pay off your balance faster and get out of debt sooner. Remember that loans with shorter terms have higher payments.|
|Access extra cash||You can also choose to remortgage into a higher-balance loan. You then get the difference between your new balance and the old one in cash. This is called a cash-out remortgage or a cash-out refinance. Learn more about this strategy below.|
|Debt consolidation||Since mortgages tend to have lower interest rates than other types of debt, you might want to use a cash-out remortgage to pay those higher-interest debts off. This basically rolls those balances into your mortgage loan and helps you pay them off more affordably.|
How a cash-out remortgage works
Cash-out remortgages can be an option for homeowners who’ve built up a bit of equity or whose home values have improved.
Here’s how it works:
- You apply for a new loan in a higher amount than your current mortgage.
- Once approved, those funds are used to pay off your old mortgage.
- You get the remaining money in cash.
This is sometimes called "tapping your equity" or "equity release" and is a popular choice for homeowners looking to renovate their properties or make repairs. You can also use the cash for any other purpose, like covering sudden medical bills or expenses, paying college tuition, or buying a new car.
Drawbacks of remortgaging
A remortgage can be a smart move in many cases, but it’s not perfect. For one, remortgaging does come with closing fees. According to ClosingCorp, the average refinance costs just under $3,400, including local taxes.
The exact closing costs you’ll pay vary by location, mortgage lender, and other factors. In some states, the average mortgage fee is upwards of $13,000.
On top of this, a remortgage is also time consuming. As with your current loan, you have to submit lots of documentation, fill out a lengthy mortgage application, and have weeks of back and forth with your mortgage loan officer before you’re done. You’ll need to carve out some free time if you want yours to go smoothly.
When to remortgage
The best time to remortgage your loan is when it can save you money. If interest rates have dropped or your credit score has improved considerably, then you can likely remortgage into a lower-rate loan and save some cash.
Just don’t forget about those closing costs. If you want to be sure your remortgage deal is worth it, you’ll want to calculate the breakeven point, or the month in which your remortgage would save you more than it cost. For example, if remortgaging would save you $100 on your monthly payment and your closing costs were $3,400, it would take you 34 months (3,400 /100) to break even on the remortgage. If you know you’ll be in the home at least 34 months, then that remortgage deal can be a smart move. (A good refinance or mortgage calculator can help you here.)
A remortgage isn't just good for saving you money, though. It can also be a good move if you want to change your current mortgage loan’s repayment schedule or terms. Borrowers who have variable rate loans, for example, may want to remortgage into a fixed-rate mortgage to avoid any future increases. You also might change your loan term if you’ve gotten a raise and want to pay off your loan faster or if you need cash flow and want to reduce your monthly bills.
The bottom line
A remortgage can be a wise move for many homeowners. If you’re considering one, it's best to talk to a mortgage broker or loan officer about it as well as the mortgage product options you have available. They can break down the costs, help you choose the best loan for your goals, and walk you through the long-term pros and cons for your unique situation.
You should also shop around, too. Despite what many homeowners assume, you do not have to use your current lender when remortgaging your loan. In fact, choosing a different lender can often save you money, so make it a point to compare at least three to five different lender options and pay attention to rates, fees, and service, too. Comparing your options will ensure you get the best mortgage deal possible.
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