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When Should a Homeowner Consider Re-Mortgaging?
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At one time in history when an individual purchased a home, they made a commitment to pay out that loan over the course of 15, 20 or 30 years and never gave another moments thought to trying to get a better deal on their mortgage. In recent years, that trend has begun to change as an increasing number of homeowners are stopping to take a second look at their first mortgages and ask whether it would be possible to re-mortgage their home.
The process of re-mortgaging a home is basically obtaining a new mortgage, usually with better terms and using the proceeds from that loan to pay off the first mortgage. Usually, the re-mortgage is obtained from a completely different lender than the first mortgage.
There are circumstances when a homeowner may be able to work out a better deal on a re-mortgage with their existing lender, so that is definitely an option worth looking into.
Interest rates are, for the most part, lower now than when most homeowners purchased their home and obtained their first mortgage. Additionally, more banks and lending institutions are competing for the business of homeowners, which is driving down the cost of mortgages and compelling lenders to offer very attractive terms. What all this means to homeowner is an opportunity to save some money.
Two of the primary reasons homeowners generally wish to re-mortgage their homes is to either reduce their monthly mortgage payments or pay off the loan sooner. The first option can be accomplished through obtaining a new mortgage loan with a lower interest rate and retaining the same mortgage term length. This technique will drive down the cost of the monthly mortgage payment. Many homeowners who wish to free up some monthly income to take care of other expenses choose this option. The second alternative occurs when a homeowner obtains a mortgage with a lower interest rate, but keeps their monthly mortgage payments at the same amount. In this scenario, more money is being paid toward the principle balance of the loan every month, which will result in paying off the loan sooner. The latter can be very beneficial for individuals who would like to retire early, purchase a second or holiday home or who are looking at financing a child's education.
Another reason an increasing number of homeowners are choosing now to re-mortgage is the ability to tap into the equity built into their home. During the course of a mortgage, every payment made on the loan raises the equity by reducing the principle of the loan. If the home is located in an area where property values are on the rise, or if a homeowner makes home improvements following the purchase of the property, the equity value can be even greater.
Homeowners who find the need to raise money are realizing that one of the best and easiest ways to accomplish this is by re-mortgaging their home. This type of cash out option allows homeowners to get cash in hand for a variety of options, however the most popular include the purchase of a new car, funding a vacation or holiday, financing the cost of home improvements or paying for major expenses such as medical bills and education costs. Another common reason people choose a cash out option when they re-mortgage is to pay off debts.
When the homeowner re-mortgages their loan in order to tap into the equity they have built up, the new loan will essentially be for the new appraised value of the home. It is possible in some situations, however for a homeowner to be able to obtain cash from the equity in their home as well as save on their monthly mortgage payments or pay off the loan sooner than would have occurred with the first loan.
Whatever the reason a homeowner has for wanting to re-mortgage their home, there are a multitude of attractive mortgage deals available on the market today. Lenders are quite motivated to offer the best terms possible to homeowners in order to snag their business. Homeowners with good credit may find they are in a position to choose between re-mortgage offers from lenders and financial institutions. In that situation, the best advice for a homeowner is to shop around, compare annual percentage rates as well as loan terms and take the time to compare all of the terms of each loan to one another. In today's competitive market there is usually a re-mortgage deal to suit a homeowners needs.
Debt Advice by Ellise Walsh
Mortgage and Finance Industry Columnist
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