How to Remortgage When Your House Value Has Increased

Remortgaging involves replacing an existing home loan with a new one, using the same property as collateral. When a home’s market value increases, homeowners can access more favorable terms or leverage their expanded equity. This allows them to secure a lower interest rate, obtain cash, or adjust the loan term.

Leveraging Increased Home Equity

Home equity represents the difference between a home’s current market value and its outstanding mortgage balance. As a home’s value appreciates, equity grows, assuming the mortgage balance remains constant or decreases. This increase in equity impacts the loan-to-value (LTV) ratio, a metric lenders use to assess risk. A higher home value with the same loan balance results in a lower LTV, indicating less risk for the lender.

A lower LTV ratio offers financial advantages. Lenders provide more competitive interest rates to borrowers with lower LTVs, as these loans are less risky. A lower interest rate can reduce monthly mortgage payments and total interest paid. Homeowners with increased equity might also choose a cash-out refinance, taking out a larger mortgage and receiving the difference in cash. This cash is not considered taxable income by the IRS, as it is a loan.

While cash received is not taxed, interest deductibility on the new loan depends on its use. Interest on funds used for home improvements (buying, building, or substantially improving the home) may be tax-deductible, subject to limitations. Funds for personal living expenses, like credit card debt consolidation, do not qualify for interest deductions. Another option is to shorten the loan term, such as moving from a 30-year to a 15-year mortgage. This can lead to substantial interest savings, even if monthly payments remain similar or increase slightly, by paying down principal faster.

Preparing for a Remortgage Application

Before applying for a remortgage, gather all necessary financial and personal documentation. Lenders require comprehensive information to assess a borrower’s financial stability and ability to repay the new loan. This includes recent pay stubs (last 30 to 60 days) and W-2 forms from the past two years to verify employment and income. Self-employed individuals need federal tax returns for the past two years and year-to-date profit and loss statements.

Other required documents include:

• Bank account statements (checking, savings, investment) for the past two to three months to show assets and cash reserves.
• Existing mortgage statements showing current loan balance, payment history, and lender details.
• Property tax assessments and homeowner’s insurance policy details (declarations page).
• Identification documents, such as a government-issued photo ID and Social Security card.

Self-assessment of financial standing is important. Homeowners should obtain their credit reports from the major credit bureaus (Equifax, Experian, and TransUnion) to identify any inaccuracies and understand their credit score. A higher credit score typically results in more favorable interest rates, potentially saving thousands over the loan term.

Calculating the debt-to-income (DTI) ratio is also important, as lenders use this metric to evaluate a borrower’s capacity to manage additional debt. This ratio compares total monthly debt payments to gross monthly income. While specific requirements vary, lenders generally prefer a DTI below 43%, though some may approve higher DTIs with compensating factors.

Navigating the Remortgage Application Process

After organizing documents, submit the Uniform Residential Loan Application (Form 1003) to a lender. This form collects personal, financial, and property information for the new mortgage. The application can be completed online, in person, or over the phone.

After application submission, the lender orders an independent home appraisal. The appraisal assesses and confirms the property’s current market value, which determines the new loan’s terms and LTV ratio. A licensed appraiser inspects the home and analyzes comparable sales data to provide an objective valuation, influencing the maximum loan amount. The appraisal validates the increased home value, allowing the lender to finalize the loan amount based on updated equity.

After the appraisal, the application moves into underwriting. The lender’s team reviews all submitted documents, including income verification, asset statements, credit reports, and the appraisal. Underwriters assess the borrower’s creditworthiness, ability to repay the loan, and the property’s value to ensure compliance with lending guidelines and manage risk. This process can take several days to a few weeks.

The final stage is closing, where the loan is finalized. At closing, the borrower signs legal documents, including the new promissory note (outlining repayment terms) and the mortgage or deed of trust (securing the loan). For a cash-out refinance, additional funds are disbursed. Closing costs, typically 2% to 5% of the loan amount, are also paid, including fees for origination, appraisal, title insurance, and recording. Homeowners receive a Closing Disclosure at least three business days before closing, detailing all final loan terms and costs.