Real Estate Law

Remortgaging

Remortgaging, more often known as refinancing, is a process whereby a home loan borrower (the mortgagor) transfers their mortgage debt to a new lender (the mortgagee) while retaining the same real estate as security for the loan. Because mortgage laws are complicated and vary from state to state, it is best to consult with a real estate attorney in your state if you have concerns regarding the intricate process of remortgaging.

What’s the advantage of remortgaging? People may engage in the remortgage process to obtain more favorable interest rates, consolidate debt, and eliminate the necessity for mortgage insurance. With a lower interest rate, a homeowner can reduce their monthly payments on their current mortgage or remortgage deal.

In debt consolidation, the period over which the debt would need to be paid back may be increased or decreased depending on the new mortgage terms and the nature of the debts being consolidated. Finally, the requirement for mortgage insurance (also known as private mortgage insurance or PMI) may be eliminated when the homeowner’s equity reaches at least 20% of the home’s valuation.

Mortgage Term and Interest Rates

The term “remortgaging” is usually interchangeable with “refinancing” under U.S. law, except that “remortgaging” might also refer to remaining with the same current lender to pay off an existing mortgage using new debt rather than using a different lender. The most common reason for remortgaging or refinancing is to take advantage of more competitive interest rates available in the market.

The interest rate on the mortgage is the amount of interest that a borrower must pay back to the lending bank during the life of the mortgage deal. For example, a thirty-year home loan may be locked into a fixed rate of five percent, a fixed-rate mortgage.

If the amount owed on the mortgage is $100,000, a five percent interest rate over the thirty-year life of the debt can mean tens of thousands of dollars in additional costs to finance the debt over three decades.

If economic conditions are favorable, banks might offer to refinance home loans at a lower rate. With a lower rate, a borrower may either be able to pay off the home sooner or, in the alternative, choose to keep the debt timeline the same (or go with an even longer-term) to lower their monthly repayments instead.

In the above example, this would mean either retaining the thirty-year schedule of mortgage payments but at a lower installment amount or keeping the installment amount the same in exchange for shortening the loan payback schedule to something closer to fifteen, ten, or five years.

Debt Consolidation

Refinancing to consolidate debt can allow a borrower to “cash out” equity in one’s home (based on the value of your property) to pay off other higher-interest debt. Sometimes the extra cash might also be used to make home improvements or pay off other expenses relating to the home.

For example, a homeowner who concurrently owes debt across various assets may wish to concentrate that debt into only one asset class. Suppose the homeowner owns significant amounts of high-interest debt on their vehicle and multiple credit cards. Here, the homeowner is indebted across different asset classes because money is owed not only on their residence (real estate) but also on their car and credit card accounts.

Comparatively speaking, real estate loans usually have the lowest interest rates because they are considered safe assets. Consequently, the homeowner’s car and credit card debt might be significantly more expensive, especially since the latter can be as high as twenty to thirty percent per year.

In the above example, the homeowner might refinance with the bank to convert equity in their home into cash in their pockets (i.e., release equity). This might mean that more money will be owed over the life of the mortgage debt, and it might take longer to pay off the home. However, debt on real estate is financed at relatively lower and more stable interest rates (ten percent or less), which reduces the chances of foreclosure in the future. Therefore, the homeowner can use the cash-out opportunity to eliminate or significantly reduce the debt they owe on their car or credit cards, which might be well over ten percent.

Mortgage Insurance

For many homeowners, purchasing their residences took a lot of work. With rising real estate prices and ever-increasing living costs, it can be difficult for most people to save enough money even to make a down payment on their first home.

While banks and mortgage lenders ideally like to see a large down payment of twenty percent or more, it can be difficult for borrowers to come up with, for instance, $100,000 for a starter home that might cost half a million dollars in today’s expensive market.

For the above reason, whether self-employed or receiving wages, many homeowners have difficulty generating a 20% down payment on their mortgages. Many borrowers, therefore, turn to other programs, such as loans insured by the Federal Housing Administration (FHA), to purchase their dream homes.

For borrowers with a poor credit history, credit rating (credit score), or largest savings to warrant a large payment towards securing a mortgage, FHA loans focus on housing affordability without requiring stringent loan-to-value ratios (LTV). The catch is that such loans usually require annual mortgage insurance, whose premiums can significantly affect the mortgage cost over time and on top of the regular base rate.

Mortgage insurance costs can be reduced or eliminated through refinancing. A borrower can use additional cash (or built-up equity over time) to qualify for a conventional mortgage, where the debt owed is no more than eighty percent of the home’s value.

Remortgaging work may be an effective strategy to obtain a better rate, consolidate debt, avoid foreclosure, or reduce mortgage costs. Consolidation of debt can be an incredibly effective tool in the context of loan modification and foreclosures. You should ensure you will not incur any unnecessary arrangement fees, early repayment charges, overpayments, valuation fees, exit fees, or unwarranted legal fees for attempting to refinance a mortgage through a remortgage application or mortgage application.

A mortgage calculator would be a helpful aid during the whole process, ensuring that you have a clear idea of your mortgage repayments. To better understand your situation and ascertain the best mortgage provider, consulting with a real estate attorney may be more helpful than a mortgage broker or adviser.

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