Ten things to know about remortgaging

WE all have our price. When it comes to remortgaging, what’s yours? Chances are the answer is savings of £93 a month. That is the trigger point at which borrowers take the trouble to find a better deal, according to research by Bradford & Bingley, the high street broker.

If you are ready to make a move, here are ten things that you need to know about remortgaging.

1. No excuse for apathy

Charcolonline, the mortgage website, says that more than half a million homeowners squander hundreds of pounds each year by not switching from their lender’s standard variable rate (SVR).
Background

* A basic guide to mortgages

* Ten things to know about remortgaging

* How to sell your home without an estate agent

* Ten things to know about equity release

* Ten ways to combat rising mortgage costs

2. Complacency costs

Drew Wotherspoon, PR manager for Charcolonline, says: “Some consumers are sitting on their hands when they could make great savings.”

For example, an interest-only, £100,000 loan on an SVR of 7 per cent costs £583 a month. A switch to a two-year fixed rate at 4.28 per cent would cost only £416 a month.

3. To fee or not to fee

Remortgaging can incur arrangement, valuation, legal and administration fees of up to £1,500, but there are deals that pay some of these costs for you.

4. Fees can cut costs

Few things in life are really free, and fee-free deals tend to carry rates that are up to a quarter of a percentage point higher than products where you pay the costs. The larger your loan, the more cost-effective it will be to secure the keenest rate and pay the fees.

5. Redemption penalties

These are charged when you desert a mortgage during any offer period, but some lenders charge beyond this. Penalties can cost thousands, so work out yours before switching.

6. Don’t fixate on base rate

Trying to second-guess the Monetary Policy Committee by waiting for rates to fall further before switching is not a good idea unless you are a confident economist (and plenty of these get it wrong).

7. What’s important?

Do you want the stability of knowing what your repayments will be by opting for a fixed rate? Would you be happier taking a chance that rates will remain stable or come down by selecting a mortgage that tracks the base rate? Mortgages that offer a discount on the base rate are usually cheaper than fixed-rate deals.

8. It’s no big deal

Remortgaging typically takes between four and six weeks. Mr Wotherspoon says: “There is the misconception that remortgaging takes up too much time and effort, but it is relatively painless for most people and should not take more than two hours of a borrower’s time.”

9. Advice on advisers

With thousands of mortgages available, asking an expert to find the most suitable one for you is a good idea. Some brokers charge up to 1.5 per cent, but you can receive independent guidance at no cost. London & Country, for example, offers a free telephone service with brokers paid commission by mortgage lenders.

10. Do you need the equity?

It can be tempting to cash in some of the equity in your home to pay for anything from home improvements to holidays. This is a cheap way to borrow, compared with credit cards and personal loans, but taking out a large chunk of cash and paying it back over the term of your mortgage means that you could still rack up a lot of interest.

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Refinancing for the Right Reasons

Deciding when or if to refinance your home depends primarily on your own unique financial situation. There really is no clear-cut rule for when or when not to do it. There are times when it makes economic sense to refinance. In order to ascertain what’s best for you, it’s important that you take stock of your own financial circumstances in relation to your financial objectives and goals.

One major consideration that you must be aware of is the length of time that you anticipate living in the home. Another factor to take into account is the direction that market rates are moving, both currently and in the near to intermediate future. Any decisions that you make concerning refinancing should rest largely upon careful deliberation of these and other issues.

One of the main reasons that people refinance their homes is to consolidate their high-interest credit card debt. Converting this taxable debt to tax-exempt mortgage debt can literally save thousands of dollars over the life of the loan. And mortgage interest rates are generally significantly lower than credit card and installment loan debt, so refinancing to pay off those high interest-rate loans only adds to your savings.

Lowering your monthly payments is another very popular reason for refinancing. For instance, an interest rate drop of only one-half to three-quarters of one percent can lower your monthly payment. However, the cost of obtaining the refinancing may nullify any savings that you could realize. This is when you need to be aware of how long you will continue living in the home. Since most families generally change dwellings every six- to nine years, the length of time you stay in the home after the refinance will determine if you’ll be able to recoup the costs of getting the new loan.

Changing the term of your mortgage can also lower your payment. Even with the same interest rate, going from a 15-year to a 30-year mortgage will significantly lower your monthly payments. However, the total amount that you’ll pay in additional interest over the life of the loan will be dramatically greater. But again, taking into consideration the length of time you’ll live in the house after refinancing, the lower payments may be worth your while.

Since the summer of 2004, the Federal Reserve has raised interest rates several times and most experts foresee that trend to continue. If you have an adjustable-rate mortgage (ARM), your interest rate may eventually adjust to a rate that’s higher than a fixed-rate mortgage. It may therefore be prudent to consider refinancing to a fixed-rate before that happens. Again, you’ll need to take into account the amount of time you’ll remain in the home. If you plan on moving within a few years, for example, it may not be cost-effective to refinance.

You can gain access to the equity in your home by opting for cash-out refinancing. The money can be used for higher education costs, home renovations, or any other financial needs that you may have.

In order to make the best decision for yourself and your family, it’s crucial to be aware of your financial situation as well as your short- and long-term financial goals. To get an idea of the potential financial impact of any refinancing, be sure to use our wide array of Mortgage Calculators. They’ll help to give you a clearer picture of the monetary implications of your decision before you commit to it. After all, the best decisions are based upon the most thorough information.

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5 Important Refinancing Points

When considering refinancing your mortgage, it literally pays to be smart. Clearly, the more information that you can gather concerning your options, the better position you’ll be in to make good financial decisions. Keep these points in mind when shopping for refinancing; they could very easily save you thousands.

* Remember, the lowest interest rate offered is not necessarily the best deal. Many lenders will offer a very low rate to get you in the door, only to charge you several points on top of the loan. A point is a fee equal to one percent of the loan. A one-point fee on a $150,000 loan would be equal to $1,500; a two-point fee would be $3,000.
* Remember, closing costs can vary with different lenders. Closing costs typically include things such as credit report fees, title company search and insurance fees, loan origination fees, appraisal fees and documentation fees among others. Lenders are bound by law to provide you with a Good Faith Estimate of closing costs within three days of taking your loan application. Your actual costs may vary slightly because the lender does not always know what the exact cost of a certain fee will be from a third-party provider. And different lenders themselves can charge different rates for their loan services. Also keep in mind that some lenders may advertise “no closing costs” on their refinance loans. The lender may pay the closing costs for you, and then recoup those fees (and then some) by charging you a higher interest rate on the loan.
* Remember, there may be other fees involved when you refinance. For example, some lenders may require that you keep an amount equal to 12 months of property tax in escrow. Others may require six months worth of funds to be held; other lenders might not require any escrow money at all. While you’re at it, ask if your homeowners insurance will be paid by you directly or if the lender will require an escrow account for that as well.
* Remember, an online bank might give you your best loan deal. Online banks may have lower overhead costs and more streamlined account and loan processes, and pass those savings on to their customers in the form of more attractive loan and earnings rates. Doing your research online can turn up some very competitive loan rates. But remember; check out any online bank that you are considering with the Federal Deposit Insurance Corporation (FDIC). This is actually a good idea to do for all banks that you have any dealings with.
* Remember, get everything in writing and pay attention to deadlines. For example, if you are quoted a specific interest rate, make sure that it’s given to you in writing. Be aware, however, that interest rates are only guaranteed, or locked in, for a short period of time, usually thirty days. If rates go up during that lock-in period you‘ll still keep your guaranteed rate. If rates go down during that time, most lenders will automatically give you the lower rate, although they are not legally obligated to do so.

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Remortgaging to free up cash

If the value of your home has risen significantly since you took out your mortgage – and, frankly, whose hasn’t over the past few years – you might be tempted to remortgage to free up some of that cash.

You could clear credit card or personal loan debts – or enjoy spending it on home improvements, a new car or a fabulous holiday.

With so many mortgage lenders competing for business, provided you’re up-to-date with your repayments and your financial situation hasn’t deteriorated markedly, you should have no difficulty finding one willing to offer you a larger loan.

Chances are you will even be able to get it at a lower interest rate than you are paying now.

If you have a particularly good deal with your existing lender, and it’s keen to keep your business, you might simply be able to increase your current loan, avoiding the hassle and cost of remortgaging.

But however you go about it, the end result is that you will owe more, so think very carefully before committing yourself.

To help you decide if it really is worth increasing your mortgage, read The dangers of remortgaging to free up cash.

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Why remortgage?

The simple reason is because it will save you an absolute fortune. Cutting 1% off a £100,000 mortgage will cut your costs by around £80 a month. Remortgaging is the biggest single money-saving activity possible, the financial equivalent of liposuction. Take the plunge and the pounds will slip off straight away.

The reason for a printed guide is because remortgaging is just too large a subject for an online version. It's something you need to sit down, read through and take some time over. After all a mortgage is likely to be your biggest single expense and therefore getting the remortgage right offers the biggest single savings.

Does the credit crunch change anything?

The guide was printed before the Credit CrunchThe Credit Crunch

This is the name given to the current phenomena that banks and other big financial institutions are struggling to find money to borrow. As they can’t find money to borrow they’ve less to lend out, which means the cost of debt is increasing, and its availability is decreasing. In other words it’s getting more difficult and more expensive to borrow.

Close , all the information in it holds true though. The main difference is that where once mortgage companies were fighting for business; now many don’t want it. It’s tougher to get a new mortgage deal and tougher still to get a very cheap one. This makes it even more important that you follow through the guide to understand how mortgage deals work before trying to find the right one for you.

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Q&A: Moving your mortgage

Thousands of people switch mortgage provider each year, some to save money, others as a means to borrow more cash.

What factors should you bear in mind when switching mortgage providers.

Can remortgaging really save money?

It depends.

It is estimated that more than half of all borrowers are continuing to pay over the odds for their mortgage each month.

Usually these people are paying the lender's standard variable mortgage rate. There will be lower rates available from other providers.

But this is not the whole story.

In recent years, banks and building societies have been hiking mortgage fees to subsidise attractive headline interest rates.

So called mortgage arrangement fees have sky-rocketed as have charges for redeeming a mortgage.

As a result, you have to do the sums to make sure that what you gain through switching provider - a lower rate of interest - is not lost through higher charges.

That sounds very complex, what help is available?

There are financial professionals who can advise you. Some of these are employed by lenders and may only be able to recommend the products of one mortgage provider or a small panel of providers.

A financial adviser may not be the best route to a future mortgage deal.

But there are a host of independent mortgage brokers who are free to advise you from the whole of the mortgage market.

However, be aware that they may take commission from the provider they recommend to you.

You may also have to pay a fee for independent mortgage advice.

It is also wise to do your own research to compare the rates that a lender or broker is offering you.


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What is remortgaging?

Remortgaging is when a borrower who already has a home loan with one lender switches it to another one.
The practice was relatively rare until 15 years ago, when lenders mostly offered only basic variants of variable rates.
The assumption was that borrowers would simply stick with their existing mortgage for its full duration.
Competitive market
But in the early 1990s, as property prices fell and the market was in the doldrums, mortgages became much more competitive as lenders realised that the only way to win new business was to battle for each other’s existing borrowers.
Thereafter, lenders also found themselves competing for business among new homebuyers, offering ever more sophisticated deals.
Initially, they tried to keep their borrowers by tying them to heavy redemption penalties, sometimes stretching for years after the special deals that first attracted them came to an end.
Today that practice is largely non-existent, with most penalties applying only for the lifetime of the deal itself.
Meanwhile, some 40% or more of all new loans in the UK each month are remortgages.

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