In time of declining interest rates, it is often beneficial to switch to a more favorable interest rate from a different lender. This process is called remortgaging, (aka. refinancing) basically it is the process of paying off one mortgage with the proceeds from another mortgage using the same property as security. The term is primarily used in the United Kingdom while in the United States the term refinancing is more common.
Generally, remortgaging doesn’t involve any physical moving it is simply the transfer of a mortgage from one lender to another. Homeowners may choose to remortgage for a variety of reasons but most commonly it is to reduce the overall monthly mortgage payment amounts. However other reasons may include to reduce the size of repayments, to pay off a mortgage earlier, to raise capital, or to consolidate other more expensive short term debts.
If a homeowner is simply switching from one product to another with the same lender; this is not considered a remortgage which involves the removal of one legal charge over a property and its substitution with another in favor of a new lender. Remortgaging charges can be steep and so the other benefits must be weighed against the costs carefully in order to determine the payback period of the benefits compared to the costs involved with the new mortgage under the remortgage plan.
A loan (debt) might be refinanced for various reasons:
- To take advantage of a better interest rate (a reduced monthly payment or a reduced term)
- To consolidate other debt(s) into one loan (a potentially longer/shorter term contingent on interest rate differential and fees)
- To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees)
- To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)
- To free up cash (often for a longer term, contingent on interest rate differential and fees)
The major cost of a remortgage will be transaction fees on the refinancing. These fees must be calculated before embarking on a loan refinancing, as they can wipe out any savings generated through the remortgage. There may also be penalties due when the previous loan is paid off early. Penalty clauses only apply to loans that are paid off prior to maturity.
This article uses material from the Wikipedia article Remortgage, which is released under the Creative Commons Attribution-Share-Alike License 3.0.
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