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July 29, 2023

What Is Mortgage Refinancing & How to Do It.

By Emma Jones

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If your current mortgage doesn’t offer you the best perks, […]

Mortgare Refinance

If your current mortgage doesn’t offer you the best perks, or if you simply change your mind about it, you may be thinking there’s nothing you can do to fix the situation. That is not true. You’re not stuck with your current mortgage; there are multiple refinancing options you can consider to benefit your finances. But before you decide, you need a good understanding of the process. 

Our team of mortgage experts has prepared this handy guide to thoroughly answer the questions: What is mortgage refinancing & how to do it? We’re here to walk you through the pros, cons, and steps of refinancing a mortgage, and we’re more than happy to do the legwork for you to secure the right deal once you make up your mind.

What Does Mortgage Refinancing Mean?

Let’s start by clearing up the definition of the term ‘mortgage refinancing’ as it seems to confuse a lot of people.

Refinancing a mortgage doesn’t translate into redoing the mortgage. Instead, it means that you’ll use a new mortgage with better terms to replace your current loan. In other words, you get a new mortgage to pay off your existing mortgage, leaving you to pay off the interest on the new loan only. 

After mortgage refinancing, your lender will have paid your current loan with the new loan, and you’ll have one mortgage with one monthly payment. 

Additionally, the refinancing process involves revising mortgage terms such as the payment schedule and interest rate.

The term ‘refinance’ was first coined back in 1901 with the rising popularity of the process. Mortgage refi and remortgaging are other terms used to describe the same concept.

Refinancing a mortgage is particularly common with house loans to benefit from the increase in their value. For example, you take a mortgage to buy a house for £250,000 and you’ll receive 75% of the value. So your mortgage is £187,500.

Let’s say the value of the house doubles over the following 10 years, so it’s now worth  £500,000. To benefit from this value upsurge, you can take a new mortgage to grant you 75% of the new value; £375,000.

This way, you can pay off the remaining amount of your old mortgage and the rest of the money will go to you. This is just one of the advantages of refinancing a mortgage, we’ll discuss more of them in the upcoming section.

Why Should You Consider Refinancing Your Mortgage?

If you’re thinking about refinancing your mortgage, the following are a few of the top reasons why this process may be the right move for your finances:

1. You Can Get a Lower Interest Rate and Monthly Payment

A new mortgage can be an effective pathway to acquiring a lower interest rate.

This can help you save a lot of money over the length of the mortgage term, whether the market rates have decreased since you got the first mortgage or you manage to improve your credit score.

A lower interest rate also brings about lower monthly payments, further supporting your money-saving efforts.

A rate-and-term refinance mortgage can get the job done for you. Keep in mind, however, that the rate situation nowadays makes it tough to produce significant savings unless it’s been at least 10 years since you got your original mortgage.

2. You Can Adjust the Duration of Your Mortgage 

Shortening the period of the loan is a common reason why people choose to refinance their mortgages.

If you have, say, 20 years left on a 30-year loan, you can refinance to 15 or 10 years. This is a long-term savings opportunity that typically qualifies you for a lower interest rate.

Reduced interest means less money you have to pay over the life of the mortgage, but shortening your loan term also corresponds to higher monthly payments. You will, however, become free of your mortgage faster.

3. You Can Change the Type of Your Mortgage Rate

The interest rate on your mortgage can be fixed, variable, offset, tracker, or another type. Refinancing your mortgage presents a chance for you to change the kind of interest tied to your original loan.

You may be tired of worrying about the instability of variable rates and looking to switch to a fixed rate. You may be trying to take advantage of market fluctuations by changing your fixed-rate loan to a tracker rate.

Whatever change you want to make, refinancing allows you to explore all your options. And at When The Bank Says No, we might be able to advise which path is best for you to take. 

4. You Can Borrow Money via Equity

Last but not least, refinancing your mortgage can be a gateway to accessing more funds, not just saving money. If your home equity is significant enough, you can use it to obtain a cash-out refinance that’ll help you borrow more money.

You may want to do this to finance a substantial expense (such as a university education or a home improvement project), consolidate debt, invest, or buy out a partner in a divorce.

While borrowing money does add to the total loan you owe, cash-out refinancing usually has a lower interest rate compared to other types of mortgages or credit cards.

There’s also a form of mortgage refinancing known as cash-in refinance. It allows you to feed money into the loan to pay off its balance rather than take cash out.

What Are the Downsides of Mortgage Refinancing?

Deciding to refinance your mortgage offers various advantages, but the process also has its pitfalls. You need to consider both aspects to ensure you’re making the best move for your financial health.

The following are a few reasons why mortgage refinancing may not be suitable for your case:

1. You May Face a Higher Interest Rate or Pay More Every Month

Some people refinance their mortgages to extend the mortgage period. In this case, you may end up paying more interest for the duration of the new mortgage.

On the other hand, if you refinance your loan to get a shorter mortgage term, you’ll be free of your loan faster but you’ll probably have to deal with larger monthly payments.

This can be a problem if you’re unable to budget for the extra expense.

2. You May Be Limited by Market Conditions

You may want to refinance your mortgage, but the market conditions may not be suitable for the decision especially if you’re looking during a period of increasing interest rates. 

In this case, finding a better deal on a new mortgage can be quite difficult.

3. You May Hurt Your Credit 

Refinancing your mortgage can lower your credit score in various ways, such as:

Credit Inquiries

The refinancing process involves applying for a new mortgage before you can get it.

As part of the application procedure, the lender will conduct a hard inquiry on your credit profile. This means they’ll check your credit history and credit score.

This inquiry can take some points off your credit score temporarily. If there are multiple checks within 14 to 45 days, they usually count as one inquiry on your credit profile.

So if you’re rate shopping during such a short period, your credit record shouldn’t suffer too much. But if you extend your shopping over a period longer than 2 months, your credit score could drop due to multiple inquiries.

The good news is that your credit score will go back up as you pay off the new mortgage. Not to mention, the savings you get through refinancing are usually worth the minor dip in your credit score.

Multiple Loan Applications

Finding the best deal for your mortgage refinancing venture typically calls for numerous applications to various lenders to filter out the one offering the lowest interest rate.

Multiple loan applications result in multiple credit checks, which can take a toll on your credit score if you do them over a long period of more than 2 months. Try to submit your applications within a short period (less than 45 days) to minimise the negative effect on your credit score.

Missing Payments

You may forget to pay your monthly dues on your original mortgage during refinancing, or you may think that you don’t need to pay while making the switch.

However, both scenarios could cause a drop in your credit score. You need to continue paying your old mortgage until its balance is zero.

Closing a Credit Account 

By getting a new mortgage in place of your old loan, you’re shutting down the credit account of the old mortgage. This can cause your credit score to lose some points.

Luckily, closing the account in good standing can soften the blow to your credit score. Additionally, a good payment history on the closed account can contribute to a lower credit score dip.

4. You May Suffer High Closing Fees

Refinancing a mortgage involves ending one mortgage to start another.

Depending on your lender and your agreement, the fees required to close the mortgage may be so high that they make getting a new loan not worth the hassle.

How to Refinance Your Mortgage

Now that you know what mortgage refinancing is and understand how it can affect your financial situation, let’s break down the main steps of the process.

Step 1: Figure Out Why You Want to Refinance

People seek mortgage refinancing for several reasons, including:

  • Lowering their monthly loan payments
  • Shortening their mortgage terms
  • Obtaining lower interest rates
  • Taking better advantage of their properties’ equity
  • Raising funds to cover a large expense
  • Adding or removing someone from the mortgage agreement
  • Consolidating debt

You need a good reason to refinance your mortgage, and your first task is to figure it out. Setting a clear financial goal makes it easier to find a suitable deal with the right lender.

Keep in mind that refinancing a mortgage may cut down your interest rate and monthly payments, but it’ll cause you to pay more over the term of your loan if you’re restarting it for another 30 years.

Step 2: Determine Your Equity 

The equity of your property is the total value of the property minus the amount you owe on your loan. 

To calculate your property’s equity, start by finding out your current mortgage balance. You should see this on your latest loan statement. After that, review house search websites for an estimate of your house’s value, or better yet, have a professional do an appraisal of your home to get an accurate value.

The difference between the value of the house and your mortgage balance is your equity. For example, if your home is worth £400,000 and you still owe £150,000 on your mortgage, your home equity is £250,000.

If you have 20% or more of your property’s equity, you have a greater chance of landing lower rates and fewer fees. More equity makes you a lower-risk loan.

Step 3: Check Your Credit History and Credit Score

Refinancing a mortgage switches you from your current loan to a new mortgage. To get approved for the new mortgage, you need to have similar qualifications as you had when you were seeking the original mortgage.

In addition to your property value and equity, lenders will review other factors such as credit history and credit score. The better your credit record is, the lower risk you are and the better rates lenders will offer you.

As such, it’s good practice to review your standing in these areas so you can assess your eligibility. Although there are options to refinance a loan if you have bad credit, the process will be a lot smoother if you spend a few months improving your credit profile.

Step 4: Get Quotes From Multiple Lenders

Don’t opt for the first lender you stumble upon that offers you a decent refinance rate. Contact multiple lenders, go through the pre-approval processes, and get quotes from them.

You need the rates and other terms from at least 3 lenders so you can effectively compare and decide on the one who offers you the most savings upon refinancing.

While interest rates and payment schedules should be on top of your list when comparing lenders, remember to review the loan fees and their due dates. 

Some lenders charge closing fees while others don’t charge closing costs but have a higher interest rate to make up for it. Once you’ve settled on a lender, talk to them about locking in your rate. This saves you from paying more if the rates increase before you close your refinance.

Step 5: Prepare Your Documents and Submit an Application 

Your next task is to get your documents and paperwork in order. You’ll need to provide information regarding your current mortgage and your financial situation.

Among the documents that you should prepare are recent pay stubs, bank statements, income statements, tax returns, W-2 forms, investment account statements, and sources of funds.

After you gather all the necessary documents, you can submit your application online, on-site, or over the phone depending on the lender. This way, the process goes faster and smoother.

Step 6: Offer Review

After applying, the lender will take some time to examine your case and review your offer. They’ll likely arrange a valuation of your home or property through a professional appraiser to ensure the security of the new mortgage.

You can boost your refinance appraisal by letting the appraiser know of any additions, improvements, or repairs you’ve done since purchasing the property.

Step 7: Close and Finalise the Loan

The final step is to close the original loan and finalise the agreement for the first new mortgage. You’ll sign some documents to make everything official.

You’ll also pay closing fees if there are any, or receive money if your refinance mortgage is cash-out.

FAQs

What Is the Right Time for Refinancing a Mortgage?

While you can refinance your mortgage anytime, it’s best to do it at the end of your current mortgage term to avoid paying early closing costs 

How Long Does It Take To Refinance a Mortgage?

The process of refinancing a mortgage typically lasts between 4 to 8 weeks from the date of application. The exact duration depends on your case and whether or not you provided all the necessary documents.

What Is Mortgage Refinancing & How To Do It Summary

To recap, mortgage refinancing is simply getting a new mortgage to pay off an existing mortgage. People do this to get lower interest rates, adjust the length of their mortgage, remove/add someone to the loan, borrow money, and more.

Mortgage refinancing offers various advantages and drawbacks, so you need to consider both to decide what’s best for your finances. Our team of expert mortgage brokers at When The Bank Says No can guide you throughout the entire process.

Emma Jones

Emma began her career in Lloyds Banking Group, first in the unsecured loans department at HSBC and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the the banks let their customers down by denying loans and mortgages.

Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money.

Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.

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